August 31, 2012

Two Weeks In Cleantech, 8-31-2012

Following the hypocritical “unfair subsidy” complaint against
China solar panel producers along with the 31 percent import duty
placed on them by the US government, the Chinese have now
responded through their Commerce Ministry by stating that the
United States must cut support for six government-backed renewable
energy programs or face unspecified penalties.

And so continues the trade war, which was launched by the
sour-grapes management of SolarWorld,(PINK
SHEETS:SRWRF)
and supported by those in Washington who have no clue how bad this
could be for the US economy, the growth of clean energy, and
domestic job creation.

China's Commerce Ministry said that it will now adopt relevant
legal measures, demands that the United States cancel part of the
measures that violate World Trade Organization rules and give
Chinese renewable energy firms fair treatment.

This isn't even close to over.

Meanwhile, and this certainly wasn't unexpected, Trina Solar
(NYSE:TSL) just missed on revenues and lowered shipment guidance
for FY 2012. It's crazy, I made a fortune on Trina just a few
years back. Once one of the most lucrative solar plays in the
market, hitting highs in excess of $30 a share, it's now trading
for around $4.60.

Although solar's future remains bright, it remains a minefield
for investors. And as I've stated in the past, I will likely
remain on the sidelines until sometime in 2013, when more
consolidation tightens up the marketplace, and more of that glut
gets eliminated.

August 22: The Wind Energy Taxpayer Boondoggle

Companies like Gamesa (PINK SHEETS:GCTAF)
and Vestas (PINK SHEETS:VWDRY)
were once all the rage as the wind energy industry embarked on a
tremendous growth trajectory.

But like all industries that experience rapid growth, eventually
the party comes to an end, and reality sets in.

Although the wind energy industry continues to grow dramatically
all over the world, recessionary headwinds, loss of government
support, and dirt cheap natural gas are creating a temporary
slow-down. As a result, the wind energy industry is going to have
a rough time in 2013.

Truth is, we've seen plenty of indications of this throughout
2012. Particularly with so many wind turbine manufacturers idling
or shutting down plants, lowering guidance and laying off workers.
In fact, we learned today that Vestas is now set to go forward
with its second round of lay-offs this year. This time around,
1,400 folks will lose their jobs.

The company has not made it clear where the jobs will be cut, but
you can bet that a sizable portion will be from the US, where
there just doesn't seem to be enough support in Washington to
extend the wind energy tax credit for another year.

Although I would argue that a one-year extension is of little use
at this point.

The best way to move forward on this is to extend the credit for
four to six years, with the understanding that it will never be extended
again. This will at least give the wind industry enough clarity to
make long-term decisions and prepare accordingly. That's not
possible when you keep handing out these tax credits every year or
two. As well, it'll keep the industry from turning into a
decades-long tax payer money sucker. We've already gone down that
path with nuclear. We don't need to make the same mistake
twice.

As stated in a 2011
report published by the non-partisan group Union of
Concerned Scientists, after decades of government support, nuclear
power is still not viable without subsidies.

The report also notes that government subsidies to the nuclear
industry over the past 50 years have been so large in proportion
to the value of the energy produced that in some cases it would
have cost taxpayers less to simply buy kilowatts on the open
market and give them away.

And as reported in Forbes. . .

“Nuclear power is no longer an economically viable source
of new energy in the United States, the freshly-retired CEO of
Exelon, America's largest producers of nuclear power, said in
Chicago Thursday. And it won't become economically viable for
the foreseeable future.”

Not economically viable? After 50 years of taxpayer
subsidies?!

Now understand, this is not an attack on the nuclear
industry. It's merely an observation of how subsidies can become
dangerous and addictive. We simply can't afford any more of these
decades-long subsidies burdening taxpayers. Not for anything.

I don't know if the wind energy tax credit will be extended
before the end of the year. I am doubtful. But if it
is extended, and it's only extended for one year with the
possibility of going through this same song and dance next year,
and the year after that, and the year after that - well, we're
just wasting valuable time and money. And that's not going
to help anyone.

The GS 450h, the new generation hybrid version of the Lexus
GS 350 looks like it's going to deliver an EPA-rated 31 mpg.
This is a 35% improvement over the previous generation, and of
course, a complete yawnfest. I get that this is about luxury
and not necessarily fuel economy, but I'd happily take a Tesla
Model S over a 31-mpg Lexus any day of the week. You can get a
Tesla Model S for about $58,000 before the $7,500
tax credit. The 2013 Lexus GS 450h is priced at around
$59,000. If I'm dropping $60k on a car, you have to at least
give me the same fuel
economy as a 50 mpg Prius. The Tesla Model S, by the
way, delivers about 160 miles on a single charge. With that,
I'd never have to pull into a gas station again. Unless maybe
I wanted to grab a candy bar or bag of chips.

It was once the world's largest maker of solar cells. But
around 2009, Q-Cells reluctantly handed over that title to a
handful of low-cost suppliers from China. And today we learn
that South Korea's Hanwha Corp (NASDAQ:HSOL)
is looking to buy the now insolvent German group. Of course,
this comes as no surprise to those of you who are regular
readers of these pages. We've been preaching about, and
watching unfold, the continued consolidation of the solar
industry. We expect to see more of this throughout the rest of
this year and well into 2013 and beyond. We believe that by
2015, there will be fewer than a dozen major solar players
operating globally. For now, we continue to watch everything
play out from the sidelines.

August 28: California - Fiscally Responsible?

Although California tends to be a punching bag for fiscal
irresponsibility, such rhetoric isn't always honest. California,
just like every other state in the nation, has its fair share of
waste. This is certain. But thanks to a plan designed to reduce
petroleum consumption in fleet vehicles, the Golden State has
successfully slashed its petroleum use by 13 percent compared to a
2003 baseline.

Under Assembly Bill 236, California will reduce or displace
petroleum consumption by 10 percent by 2012 and 20 percent by
2020. Today we can see that the state is certainly on its way to
reaching that goal.

Some of the actions that have enabled California to come this far
include the following. . .

In 2009, California eliminated 3,397 of the state's oldest
and most fuel inefficient passenger vehicles.

Also in 2009, the state reduced vehicle miles traveled (VMT)
by eliminating non-mission critical VMT. This was done by
eliminating 2,121 vehicle home storage permits.

In 2010, California restructured the lease rate of its rental
fleet by separately billing state agencies for their fuel. As
a result, these agencies began actively managing their fuel
usage internally.

In 2011, the state, along with Coulomb Technologies,
installed 24 Level 2 fast-charge charging stations at five
separate Department of General Services parking facilities.

In 2012, Governor Brown issued an executive order for
California's state vehicle fleet to increase the number of its
zero-emission
vehicles through the normal course of fleet replacement
so that at least 10 percent of fleet purchases of light-duty
vehicles be zero-emission by 2015, and 25 percent by 2020.

Also in 2012, California directed state agencies to order
solar reflective colors when they acquire new light-duty
vehicles. This enables a vehicle's air condition system to
work less, thereby reducing fuel consumption.

Quite frankly, this really should be used as a model for other
states. There's no doubt that a significant reduction in petroleum
use serves to provide a budgetary buffer – particularly in these
tough economic times that are only going to get tougher as
inflation takes hold.

This also gives states the opportunity to get aggressive on
petroleum reduction without relying on the heavy hand of the
federal government.

That being said, this type of thing should also be done
responsibly. California has unfortunately relied on the
utilization of biodiesel and ethanol to help it reach its goals.
Long-term, this is not economically or environmentally
sustainable. Certainly it would be nice to see more natural gas
and electricity serving as fleet fuels in the future.

Jim Jelter over the Wall Street Journal wrote his obligatory
electric vehicle-bashing piece right on schedule.

After it was announced that GM has temporarily suspended
production of the Volt for a month in order to address both an
oversupply issue and to prepare for production of the 2014 Impala,
Jelter wrote that he didn't buy it. What's to buy?

We went through this song and dance back in March. GM temporarily
halted production of the Volt due to an oversupply, and the
anti-EV brigade ran to tell everyone that electric cars, including
the Volt, were dead. Meanwhile, since that date, nearly 11,000
Volts have been sold.

This may not seem like much. And it's not. In fact, it's well
below targets. But let's revisit some other numbers from previous
disruptive vehicle technologies.

When Toyota first launched the Prius Hybrid in 1997, the Japanese
automaker sold only 3,000 units. GM sold 7,671 units in its debut
year. So in its first year, GM sold 4,671 more units of a plug-in
hybrid electric vehicle.

And look at the all-electric Nissan LEAF. In its first year,
Nissan sold more than 20,000 units. And let me remind you that the
LEAF carries with it the issue of range anxiety – something Prius
owners never had to deal with. So essentially, we're talking about
a vehicle that requires the driver to make some pretty major
changes in operating and fueling behavior.

Anytime you ask the consumer to do something differently than
he's done for years, it's a monumental task. Yet more than 500%
more units of the Nissan LEAF were sold in year one compared to
the Toyota Prius in its debut.

Today, Toyota has sold more than 3 million units of that
particular vehicle.

I'm not sure if ol' Jimbo thought electric cars would bust out of
the gate, selling millions in a matter of years. But I would
suggest he, and other EV haters take a look at previous
technologies that took decades to develop – but are now standard
for most Americans. Cell phones, high-speed Internet. Hell, even
what is now the outdated conventional internal combustion vehicle.

It was in 1903 when the president of the Michigan Savings Bank
told Henry Ford's lawyer that the horse was here to stay, and the
automobile was only a novelty – a fad. We know how that one worked
out.

Of course, the Volt story was really just used as a segue for an
attack on the latest fuel economy standards that'll take our CAFE
up to 54.5 miles per gallon. Claiming that it will tack on another
$3,000 to production costs, the new standard is being vilified.
Never mind the fact that by 2025, when the standard will be
reached, 87 Octane will likely cost you anywhere between $7.00 and
$9.00 a gallon.

Now I fully admit, I rarely agree with much government
intervention in these situations. Quite frankly, perhaps the
market can get us to the 54.4 mpg fuel economy standard by 2025 on
its own. But being that this really is a matter of national
security, I don't see much of a downside to this new CAFE
standard. I'd certainly rather take these types of steps to
displace foreign oil, then keep our military in the Middle East to
protect and secure oil supplies.

Of course, none of this really matters. At this point, partisan
slavery always wins out over rational policy. And while I wish
guys like Jelter would stop contributing to the illusion that
electric cars are failures, I at least give him credit for
acknowledging that, as a nation, we are struggling to get
long-term planning in place – because of politics. Following on his
brief coverage of Romney's
joke of an energy plan, Jelter writes. . .

So what is it going to be? More
regulation or less?

This is exactly the kind of
political sparring that drives corporations crazy. What one
party puts in place, the other seeks to remove. As long as their
so-called principles leave no room for compromise, regulatory
matters are doomed to lurch back and forth with every election.
This stifles long-term planning and kills investment.

I couldn't agree more.

Sadly, there seems to be no middle ground. And while the Wall
Street Journal will continue to publish it's anti-EV
rhetoric – which, quite frankly, is incredibly unpatriotic
seeing as EVs require not a single drop of Saudi oil to operate,
left-leaning rags will continue to sing the praises of
over-regulation, which absolutely inhibits our ability to kick
OPEC to the curb.

Neither are doing us any favors.

That, my friends, should make this a national security issue, not a
partisan one.

Yesterday, an Italian court filed criminal charges against an
investment fund controlled by Suntech Power Holdings (NYSE:STP).
The charges claim Suntech illegally built solar farms to take
advantage of state subsidies. If the charges stick, about $100
million in subsidy-backed solar farms could be dismantled. This
comes on the heels of the world's largest solar panel maker
getting hit with a class action lawsuit that claims the company
didn't reveal that a Global Solar Fund executive (and
shareholder) used $700 million in fake German bonds to help
guarantee some of the fund's financing. And just when you think
it couldn't get worse, Suntech is now desperate to land some
financing to cover a convertible bond due in early 2013. Suntech
has certainly had better days.

In more positive solar news, it looks like India's making new
moves in the solar space again. According to Tarun Kapoor, the
joint secretary of the Ministry of New and Renewable Energy in
India, India may soon auction about 30 percent of the solar
projects it has planned to be online by 2017. This would double
the nation's solar capacity. In total, India is aiming for 20
full gigawatts of solar by 2022. Following India's blackout last
month, solar got a fresh coat of shine. Considering the country
currently relies on coal to generate more than half of its
electricity, and coal shortages have India on high alert, this
isn't surprising.

August 30, 2012

The 6 Hottest Ways to Alleviate Food vs Fuel

With the US drought, food vs fuel has returned as an issue.
What alternatives are scientists, entrepreneurs developing to take
us beyond the old debate?

With the US drought, food
vs fuel has returned as an issue.

What alternatives are scientists, entrepreneurs developing to take
us beyond the old debate?

In the past week we published a report that the chairman of Nestle,
Peter Brabeck-Lemathe, has called anew for a ban on making biofuels
from feedstocks that can also be used in food production.

The backdrop for Brabeck’s comments is the US drought, which is
causing sharp falls in corn yields.

Now, there are bound to be those who shrink from taking direction on
how best to feed the world from the makers of Chocapic breakfast
cereal, Wonka bars and Hot Pockets – who will regard the Nestle
message as self-serving and transparently aimed at shifting product
margins.

But many others agree that food producers should have the first (or
only) call on these feedstock – a popular meme this week on Twitter
has been “why should people go hungry so rich men can have fuel for
their cars?”

It’s an intuitive concern for most Westerners, who are highly
urbanized, and exposed to agriculture via the grocery store. They
experience the impact of rising prices in terms of their costs, not
their returns on investment.

Not so, for the least developed countries. There, the most exposed
portion of the global population, in terms of nutrition and all the
ills of extreme poverty, tend to be subsistence farmers who are
driven into misery not by low US crop yields, but low commodity
prices.

What has driven many of them off the land, and into the cities where
they are badly exposed to US grain cycles, is the poor returns from
subsistence farming that low producer prices bring, by making
technology improvements difficult if not impossible to make cost
effective.

As a result – we are usually at an impasse. Agriculture pointing to
the benefits of rising prices for key feedstocks, consumers pointing
to the pitfalls. Hence, the food vs fuel debate.

And so the debaters debate, and debate, and debate. Meanwhile,
entrepreneurs and scientists are giving us something even more
precious than resolution of that debate. Which is to say, options
and alternatives.

Today, we look at 6 technologies and strategies that address food vs
fuel, and offer alternatives.

1. Feedstock diversification.

In biofuels, it is more talked about – the push beyond corn starch
and cane sugars into corn stover, sugarcane bagasse, woods and
forestry residues, animal wastes, algae, municipal solid waste, and
energy grasses as well as new inedible oilseed crops such as
jatropha, carinata and camelina.

But there are opportunities for food manufacturers as well.

Take for instance Solazyme (SZYM)
Roquette Nutritional’s whole algalin flour. According to the makers,
it provides “an outstanding solution for improving nutritional
profiles in many applications, such as bakery, beverages and frozen
desserts. Acting as a whole food ingredient, Whole Algalin Flour is
very low in saturated fat, is trans-fat free, cholesterol free, and
considerably reduces calories, as well as provides fiber and
protein, while providing the same overall mouthfeel and consistency
as a full fat food.”

Much of the underlying problem of food vs fuel is that multiple
sectors have fallen in love with the same feedstock – frankly,
that’s Nestle’s problem, and the problem of many biofuels producers.
If the US is addicted to oil, many producers are addicted to corn or
cane, and both sides benefit from diversifying where possible.

2. Increasing yield per ton.

There are low-yield biofuels technologies – and high-yield, in terms
of productivity per ton of biomass. At the high end, consider for
example Coskata’s 105 gallons per ton, and ZeaChems 135 gallon per
ton yields. Compared to a technology that yields, for example, 60
gallons per ton (and they are out there), that can reduce feedstock
requirements by half.

But there is more than just picking the right technology. Great
technologies are those that optimize their yields. For example, the
US ethanol industry used to have yields in the 2.5-2.7 gallons per
bushel range. Today, 2.9 gallons per bushel is state of the art at
many facilities, and POET has found ways to increase that to 3.0
gallons in some cases.

Continuous improvement is what has analysts
excited over KiOR (KIOR),
too – when first deployed at demonstration scale, the technology was
yielding in the mid-60 gallons per ton, based on Southern Yellow
Pine. But the company expects to reach 92 gallons per ton by
mid-decade – nearly a 40 percent improvement.

3. Reducing water intensity.

When drought comes, water is more precious than ever. That’s why it
was big news this week when Syngenta announced that it has signed
trial agreements with Golden Grain Energy (GGE) of Iowa and
Siouxland Ethanol of Nebraska to demonstrate the value of Enogen
grain. Both ethanol plants will complete a three-month trial with
the specialized corn grain bio-engineered to allow ethanol
production to be more efficient, cost effective and better for the
environment.

Golden Grain Energy and Siouxland Ethanol will begin their trials in
the spring of 2013 with Enogen grain harvested from acres planted
this past growing season. Following the trial, each plant will
analyze data to discover the efficiencies created from Enogen trait
technology. Pending trial results, each plant will then enter into
negotiations with Syngenta to sign a commercial agreement.

As we wrote last year in profiling the technology:

“So, you get around a 10 percent lift in total capacity (from the
speed-up), plus energy, water and carbon savings.

For example, in a 100-million gallon plant, efficiency improvements
enabled by Enogen grain can save 450,000 gallons of water, 1.3
million KWh of electricity and 244 billion BTUs of natural gas, and
carbon dioxide emissions by 106 million pounds.

That works out to around 8-10 cents per gallon in savings – that can
be shared by the grower, the plant, or the customer.

4. Supertraits and super yields.

As we pointed out in 7 paths of the New Agriculture:

If new crops are unavailable, and residues exhausted, why not try to
get more productivity out of the overall plant. In the old
agriculture, there was double-cross hybridization to put more vigor
into a plant, and there have been additional inputs such as added
nitrogen, to assist with the growing cycle.

But in the new agriculture, there are traits that confer
drought-tolerance, heat-tolerance, pest- or pesticide-tolerance.

Just last week, the U.S. Department of Agriculture deregulated MON
87460, Monsanto’s first-generation drought-tolerant trait for
corn. Drought-tolerant corn is projected to be introduced as
part of an overall system that would offer farmers improved
genetics, agronomic practices and the drought trait. Monsanto plans
to conduct on-farm trials in 2012 to give farmers experience with
the product, while generating data to help inform the company’s
commercial decisions.

The drought-tolerant trait is part of Monsanto’s Yield and Stress
collaboration in plant biotechnology with Germany-based BASF.

In specific bioenergy crops, companies such as Ceres (switchgrass,
energy cane in the Blade energy crop family) and Mendel
Biotechnologies (miscanthus) have been garnering the most attention
as they bring new traits forward for the new integrated
biorefineries utilizing energy crops.

5. Utilizing Waste Lands.

If all the above strategies are already used, or unavailable, why
not bring lands into production that have previously be
un-productive. This is closely related to the “super traits” pathway
– in fact, many of the same companies, such as Ceres (CERE),
are hard at work on traits such as salt-tolerance that will open up
lands with previously unsuitable soils or water sources. But there
are also companies such as SG Biofuels, working on developing
non-food, extremophile crops like jatropha that can better handle
poor soils and low rainfall, through its JMAX portfolio.

And, there’s microalgae from the likes of Sapphire Energy and solar
fuels from the likes of Joule Unlimited. Yields in the 3,000 to
15,000 gallons per acre range – compared to around 400 this year for
US corn ethanol yields (or closer to 500 in a normal rain season).

Electrofuels use microoganisms — typically bacteria — to directly
utilize energy from electricity and do not need solar energy to grow
or produce biofuels. ARPA-E’s Electrofuels program is seeking to
take advantage of those properties to create processes that are up
to 10 times more energy efficient than current biofuel production
methods. Back in 2010, they funded 13 projects that will attempt to
bring a feasible technology forward to achieve those productivity
levels.

The gallons per acre range – the numbers could be truly astronomical
given that these can be produced them in three-dimensions to achieve
efficiencies of acreage. Given that they utilize electricity rather
than photosynthesis, production units can be stacked. The limiting
factors are in the costs of engineering and constructing stacks, not
in available light per acre.

6. Improving results from photosynthesis.

One of the more exciting entries in recent years is the recent class
of technologies funded in the ARPA-E PETRO project.

PETRO aims to create plants that capture more energy from sunlight
and convert that energy directly into fuels. ARPA-E seeks to fund
technologies that optimize the biochemical processes of energy
capture and conversion to develop robust, farm-ready crops that
deliver more energy per acre with less processing prior to the pump.
If successful, PETRO will create biofuels for half their current
cost, finally making them cost-competitive with fuels from oil. Up
to $30 million will be made available for this program area.

The bottom line

Food vs fuel, for most, comes and goes with price cycles. We see it
as a transitory debate, usually focused on a handful of feedstocks
that producers of food or fuel have become overly dependent on. We
see it in oil, too.

To us, diversity is the solution – and diversification the strategy,
and scientists and entrepreneurs must ultimately solve the debate by
ending the need for it.

August 27, 2012

Don’t Let Waste Go to Waste

Just ask Bill Caesar, who runs the recycling and organic growth
units of Waste Management (WM),
America’s biggest trash company, which has $13.3 billion in
revenues last year.

It’s hard to get many cities and towns to embrace recycling.

It’s hard to get homeowners to figure out which plastics go into
which bin.

It’s expensive to build out the infrastructure needed to separate
materials, and ship them to customers.

And now, to make matters worse, the prices that buyers are willing
to pay for cardboard, used paper, metals and plastics have fallen,
on average, by about a third. A ton of solid waste used to yield
about $150 in recycling revenues, more or less. Today, it’s closer
to $100. Here’s
a chart.

“The commodities are global in nature,” Bill told me the other
day. “When the French stop buying things, the Chinese stop making
things, and when that happens, they need fewer boxes and the price
of recovered paper in the US falls.”

Who would have thought that the EU’s troubles would slow progress
towards zero
waste?

Bill and I met this week to after he spoke at Wastecon, the big convention
organized by SWANA in the Gaylord National Resort and Convention
Center outside Washington, where I cam across the recycling robot,
above. (Of course you know SWANA as the Solid Waste Association of
North America. Some time ago, garbage became solid waste and the
city dump turned into a sanitary landfill.) Waste Management still
takes most of the garbage municipal solid waste
that it collects to dumps sanitary landfills–it
owns more than 250 active landfills–but Bill’s job is keep stuff
out of the ground. His unit looks for ways to extract more value
from waste, either by recycling, or composting organic waste, or
turning waste into energy.

This is a big deal, and big shift for the company. [See my
2010 FORTUNE story Waste
Management's New Direction.] Dave Steiner, the company’s
CEO, likes to say: “Picking up and disposing of people’s waste is
not going to be the way this company survives long term. Our
opportunities all arise from the sustainability movement.”

Still, the shift is happening slowly. Waste Management recycled
about 10 million tons of materials in 201o, its latest sustainability
report says, up from 8.5 million in 2009. Still, well over
half of the garbage collected by Waste Management–about 70%, Bill
estimates–still goes to landfill. The company’s goal is to recycle
20 million tons a year.

Today’s low commodity prices won’t change Waste Management’s core
strategy, which is to extract as much value from the waste stream
as possible, Bill says. Commodity prices will rise again.
Commercial and residential customers want the company to recycle.
Energy prices are likely to go up, so the company’s bet on
waste-to-energy technologies should pay off.

Waste Management’s investment strategy, which he oversees, focuses
on smaller companies that can help recover energy or materials
from waste. It has a portfolio of more than two dozen
acquisitions, joint ventures or project investments, some of which
will surely fail.

“It’s advantageous to us to invest in a series of companies at
small scale because we don’t know what’s going to work,” Bill
says. “Our intention is to learn, and once believe there is
something there, be in a position to commercialize those
offerings.”

For example, Waste Management owns a stake in a Harvest Power, a
Massachusetts-based company that processes organic waste (food,
yard waste, etc.) to make renewable energy and soil, mulch
and organic fertilizer. It’s also an investor in Agilyx, which takes
difficult-to-recycle waste plastics and turns them into crude oil,
essentially reclaiming the hydrocarbons used to make the plastic.
Other companies in which Waste Management has invested include Enerkem, whose
technology converts waste into ethanol and renewable chemicals,
and Fulcrum BioEnergy,
which turns household garbage into transportation fuels.

While these are all young companies that still need to prove
themselves, what’s striking is how much innovation is going on in
garbage industry. Wisely, Waste Management has decided that rather
than stick with its old model of taking waste to the landfill, and
risk being challenged by others, it is seeking to disrupt itself.

Bill told me that’s why he was excited to join the company. He was
hired in 2010 as chief strategy officer, after more than a decade
as a consultant at McKinsey & Co. Before that, and before
business school at Duke, he worked for the CIA and the state
department as a Russian specialist and spent a year in St.
Petersburg after the collapse of the former Soviet Union. So he
knows that big changes can happen, and they create opportunities.

“This industry is at an inflection point,” he says, “and that
doesn’t happen very often.”

—

DISCLOSURE: I was paid to moderate a sustainability event for
Waste Management last February.

August 24, 2012

Jobs at Gevo

by Debra Fiakas CFA

Management teams at the helm of public companies often shade the
realities of their competitive or strategic situation, alternately
painting better circumstances or downplaying declining
fortunes. There are myriad ways of giving management’s
guidance a reality check. Renewable bio-chemicals developer Gevo, Inc.
(GEVO:
Nasdaq) is on my “watch list” as one of the more interesting
companies in the Beach
Boys Index.

Gevo’s financial results missed the consensus estimate in both the
March and June 2012 quarters, but management made claims of
important victories. Gevo has won important decisions in the
disagreement between Gevo and Butamax
Advanced
Biofuels over process technologies related to the production
of isobutanol. Butamax had alleged infringement of its patents
by Gevo and had attempted to halt Gevo’s continued progress through
an injunction. Gevo recently took the offensive, asking a
federal court for a declaratory judgment on the validity of a
Butamax patent.

Gevo’s confidence extends beyond the court room. The Company
has continued to line up technology and distribution partners as
well as customers for its renewable chemicals products. Recent
Gevo presentations include slides with a collection of impressive
corporate logos - Sasol (SSL),
Total, Toray, United Airlines and CocaCola among others.

Management appears to be ready to put its money behind its public
pronouncements. The corporate web site lists several open
positions for technicians, including molecular biologist,
biochemist, analytical chemist and fermentation specialists.
All are ostensibly for Gevo’s homebase in Englewood, Colorado and
all appear to be focused on development activities rather than
commercial production. It would be more comforting to see open
positions for the type of activities that would lead directly to
revenue. Then perhaps we could dial in higher sales estimates
than what is reflected in the current consensus estimate. The
bevy of research analysts currently covering Gevo think revenue is
likely wind up at half the level last year.

Gevo is not immune to the unfolding economic reality for corn-based
biofuels and chemicals. That could be a problem. Without
a significant increase in sales volume or prices, Gevo may not be
able to make a dent in its current cash burn rate near $12.0 million
per quarter. Given the $38.6 million on the balance sheet,
Gevo appears to have only enough resources to last through the first
quarter 2013.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small
Cap Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein. GEVO
is included in Crystal Equity Research’s Beach
Boys Index.

August 21, 2012

No Eeyores for KiOR

Analysts are
bullish as KiOR’s (KIOR)
drop-in biofuels technology transitions to commercial phase – what
factors are driving all the good vibes?

There are a lot of Eeyores
around the advanced biofuels space these days – well, around the
United States and to a great extent the EU as a whole, really.
Gloomy, pessimistic, chronically depressed.

Investors have been, in a similar mood, hammering advanced biofuels
and biobased material stocks – in some cases to within a few bucks
of cash on hand.

KiOR, by contrast, has been generally able to create and sustain its
own weather, and has become a rare oasis for analyst optimism. In
today’s Digest, we look in depth at the data behind the cheers.

In Texas, the company this week announced a second quarter 2012 net
loss was $23.0 million, or $0.22 per share, compared to a net loss
of $16.8 million, or $0.16 per share, for the first quarter of 2012
— but it was hardly the financials that prompted a wave of bullish
reports from a once-bitten, twice-shy set of equity analysts who
rarely hand out lollipops these days for early stage, publicly-held,
advanced biofuels companies.

In many ways, KiOR’s technology resembles a time machine –
compressing the timeline by which Mother Nature accomplishes the
transformation of biomass into fossil crude oil over millions of
years, into a couple of seconds.

As a thermochemical technology, it has optionality on feedstock –
initially, the plant will use southern yellow pine, which according
to analyst option has a sustainable surplus at this time of 59,000
tons per day – enough at 90 gallons per ton to support – all by its
onesey – 1.9 billion gallons of fuels. The other main input?
Abundant (and highly affordable) natural gas.

Moreover, the Renewable Fuel Standard (RFS2) mandate of 36B
gallons by 2022 should support premium pricing. Scale is up 400x, to
10 TPD, and a 500 TPD plant should be on line in H2:12. We model
thirty six 1,500 TPD plants from 2014 to 2021, and licensed partners
should add 12 more.

A next-generation catalyst – boosting nameplate capacity by up
to 20 percent?

The process produces liquids – which are hydrotreated into fuels;
gases, which are burned to help provide process electricity; and
coke, which is burned to provide process heat and regenerate the
catalyst. However, a new catalyst, KiOR, said, may change the ratios
and allow plant to produce up to 20 percent higher throughput. More
about that before year-end.

Yields, now and later

In early 2009, yields were in the 17 gallons per ton range, but have
improved to 67 at the present time and are targeted to reach the
high 80s by 2014 en route to an eventual target of 92 gallons per
ton.

Costs, now and later

For 2013, feedstock is modeled by analysts Rob Stone and James
Medvedeff at Cowen & Company at $0.29 for natural gas (per
gallon produced), with an expected price of $0.52 per gallon by
2022. Yellow pine is modeled at $1.07 per produced gallon in 2013,
dropping to $0.89 per gallon in the long term – that equates to a
$70-$80 range in the per-ton cost of wood.

Bottom line – today at plant #1 with 250 tons per day of wood
biomass arriving at the time of commissioning, costs will be in the
$16.27 range per gallon, according to Cowen & Company, of which
the marginal costs are $8.97 per gallon.

With scale-up, total cost per gallon drops to $5.95 by 2013, $3.73
per gallon in 2014, and the magic sub-$3.00 figure in 2015 when it
is expected to reach $2.62 per gallon at full-scale.

Scale, now and later

For now, KiOR is commissioning its first commercial-scale facility,
which each ultimately have a 62.5 million gallons capacity (based on
1500 tons per day).

Production this year is expected to be in the 800,000 gallon range
as plant #1 commissions, rising to 10.2 million gallons in 2013, and
rapidly scaling up to 273 million gallons by 2016 en-route to 2.3
billion gallons by 2022, according to Cowen’s ramp-up thesis.

When will we know?

There are three key inflection points for KiOR to watch.

This year – plant #1 is expected to complete commissioning
this year – watch that for a confirmation that the technology works
as planned at scale.

2014 – plant #2 is expected to be up and running by the end
of 2014 – watch that for confirmation of the company’s proposed
timeline for new plant construction and financing, and ramp-up
towards the 2 billion gallon marks by the early 2020s.

2016 – the company is expected to go sub-$3.00 in terms of
cost per gallon for its fuels – thereby reaching the expected parity
point with fossil fuels. If it reaches that milestone – essentially,
as an infrastructure-compatible, made-at-home, drop-in fuel it
should be fully independent of the Renewable Fuel Standard in terms
of needing a mandate to assure a market.

Analyst opinion

Rob Stone and James Medvedeff, Cowen & Co.: “A
next-generation catalyst may boost nameplate capacity up to 20%,
reducing future fixed and operating cost. However, potential
start-stop operations and ASP discounts during the initial ramp
reduce our estimates. First Columbus revenue, more yield details,
Natchez capex and offtake agreements should provide substantial
triggers to support fundraising in Q4. We see 80%+ upside potential
in KIOR rel. to the mkt in 12 months.”

Mike Ritzenthaler, Piper Jaffray. On the call, management
stated that they expect Columbus to cost ~$213 million, 4% below the
estimate on the 1Q11 call in May. The company has set its sights on
completion of the design package for Natchez by the end of FY12, and
has set aside $13 – $14 million for that purpose. Management
affirmed that Natchez is tracking for a late 2014 startup. In
addition, management announced that they expect lower coke
production with improved catalysis, enabling 20% more throughput and
lower capital intensity. We maintain our Overweight rating and $20
price target.

Pavel Molchanov, Raymond James: “Within the context of our
broadly favorable view on Gen2 biofuels, KiOR provides investors
with a pure-play on cellulosic biofuels. As such, KiOR is
well-positioned to address the “food vs. fuel” concerns and price
volatility surrounding sugarcane and corn. We also like the
versatility of KiOR’s biocrude – the ultimate “drop-in” biofuel.
Balancing our positive view on the company’s technology platform
with scale-up and project financing risks, we reiterate our
Outperform rating. Shares are currently trading at 63% of our DCF
estimate, and our target price of $11.00 is based on a 90% multiple
of DCF. Despite the more than 50% upside to our target, KiOR’s
distant outlook for profitability (late 2014 at the earliest) keeps
us from a Strong Buy rating.

August 19, 2012

A123′s Deal With China’s Wanxiang Would Value the Stock at $0.55 a Share

It was no secret that A123 Systems (NASD:AONE)
was desperate for money. It’s also no secret that Chinese
companies are interested in buying Western companies, especially
when they can acquire useful technology in the deal. So this
morning’s announcement that Wanxiang Group Corporation, a Chinese
largest autoparts manufacturer which has significant US
operations, had signed a non-binding memorandum of understanding
to invest up to $450 million in A123 through a combination of
bridge loans, convertible notes, and warrants seems like good news
for both companies.

A123′s stock rallied initially on the deal, but has since fallen
back. As I write, the stock has fallen back to $0.48, up
only one cent from yesterday’s close. The lack of gain
puzzled me, especially since A123′s liquidity problems are the
main reason it’s been trading at it’s current depressed level at
37% of book value ($1.27 a share.)

While regulatory and shareholder approvals need to be met, and
some existing convertible notes will need to be repurchased and
retired, it seems likely to me that this deal will go through.
Although the US government has a track record of paranoia
when it comes to the Chinese, regulators have to know that
A123 will likely go bust without a big injection of liquidity, and
American investors have not exactly been pounding on A123′s doors.

If the deal is not blocked, I expect Wanxiang will make the whole
investment. After all, this investment for Wanxiang is
almost certainly about acquiring A123′s technology and business
contacts at a discount, not about short term cash flow.
Weiding Lu, CEO of Wanxiang Group, said,

A123 offers industry-leading technology for vehicle
electrification and grid-scale energy storage, as well as strong
manufacturing and systems engineering capabilities in Michigan
and Massachusetts. We think this creates important synergies
with Wanxiang, which has been involved in this field for 12
years and has strong R&D and manufacturing capabilities in
China, especially as we continue to expand on our strategy of
investing in the automotive and cleantech industries in the U.S.
This MOU is the first step toward a longer-term agreement
through which we plan to build on the foundation A123 has
established in the U.S. and help expand the company’s
capabilities both domestically and internationally, which we
believe would create long-term value to the customers, investors
and other stakeholders of both companies.

Since I think Wanxiang is likely to make the full investment, I
think the price they are likely to pay is a good short term target
for AONE stock. As long as the stock is lower than that,
Wanxiang will have an incentive to buy the stock on the open
market, rather than exercising their conversion option or
warrants, which should provide price support.

Reading the details of the release, $75 million of the investment
is to be a short term bridge loan, which does not involve the
purchase of A123 stock. The rest is to consist of $200
million in convertible notes (which can become stock) and $175
million which might be invested with the exercise of warrants.
An exercise of all these warrants and the full conversion of
the convertible notes would result in Wanxaing controlling 80% of
the company, or about 680 million shares, based on the 170 million
shares A123 had outstanding at the end of July. Doing the
math, and assuming that the initial $75 million bridge loan is not
used to purchase shares, that’s 55 cents a share.

The current price of $0.48 makes a certain amount of sense, but
unless this deal is blocked, Wanxaing has indicated its interest
in buying A123 at $0.55 a share, which should put a nice floor
under the share price, along with a lot of potential upside as the
deal gives A123 new financial stability to execute on
existing opportunities and tackle new opportunities in
China.

It may also be the case that the conversion price of the notes is
not the same as the exercise price of the warrants. If
that’s the case, then some of the expected note conversion or
warrant exercise would have to take place above $0.55 a share, and
this would in turn increase Wanxiang’s incentive to buy stock on
the open market.

Given all that, I just bought a little A123, which I expect to
rally as the various barriers to this deal are overcome.
It’s still a small investment, since there is still
no guarantee that the deal will go through, and if, for
some reason the deal does not got through, AONE will almost
certainly continue its slide.

UPDATE: After reading this
article, I decided that Petersen is right, and any
investment in A123 bears careful watching. Since I was going
on vacation, I sold my stake at a small profit.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 17, 2012

First Solar Goes to Thailand; US Stays in OPEC's Grasp: The Week In Cleantech, 8-17-2012

Jeff Siegel

August 15: First Solar (NASDAQ:FSLR) Moves to Thailand

In an effort to continue its steady expansion, First Solar
(NASDAQ:FSLR) has set up a Thailand operating subsidy and has
officially opened its Bangkok office.

The Thai subsidiary is charged with the responsibility of expanding
FSLR's market for utility-scale solar projects. Senior Manger of
Business Development told reporters. . .

“The long-term energy fundamentals in Thailand are very favorable
for a solar power solution to meet their growing energy needs, and
we will continue to invest here as part of our strategy to develop
sustainable, utility-scale solar markets.”

Yesterday, my colleague R.T. Jones commented on how non-China solar
companies are competing against China's solar dominance. This could
be seen as an example of that. Although to assume China's solar
industry is also not sailing through rough seas is naïve.

In fact, a Reuters report that came out yesterday indicated that as
solar panel prices continue to fall, China solar companies will
continue to struggle with increasingly heavy debt loads. We've been
saying this for almost two years now!

So what's next?

Major consolidation.

Mark my words, although I remain extremely bullish on the long-term
outlook for solar, we will not have much more than a dozen or so
profitable solar companies operating globally after 2015.

August 16: Ford (NYSE:F) Ready to Dominate Electric Car Market

Ford (NYSE:F) announced yesterday that it
now has more than 1,000 engineers working on vehicle
electrification, with dozens more to be added next year. The
company is also now doubling its battery-testing capabilities in
hopes of accelerating its hybrid and electric vehicle
development by 25 percent. The Focus Electric is Ford's first
all-electric offering for the masses. It's actually a pretty
sweet car, although like most electric cars, it is a bit pricey.
To be honest, I think the company's actually going to get a lot
more traction from its C-Max, which is a crossover SUV that
comes in both conventional hybrid and plug-in hybrid electric
models. The former offers a pretty impressive 47 mpg, and the
latter offers equally impressive fuel economy with a 20-mile
all-electric range as well. Another reason I think Ford's got a
winner here is the price. The conventional hybrid model goes for
about $26,000. Competitive with the Prius V (The Prius version
of an SUV crossover), but offering a bit more room and luxury.
And the electric model comes in at about $34,000. It does
qualify for a $3,740 federal tax credit, which brings it in
around the $30,000 mark. Not bad for a plug-in model, especially
considering the roominess of the vehicle. I definitely think
Ford's going to crush it on the C-Max.

CX Solar Korea has announced it's leading a
group of investors that will pony up nearly $1 billion to build
a massive solar farm in Pakistan. The $900 million project is
set to begin with a 50 megawatt installation, with follow-on
projects that'll reach 300 megawatts by 2016. CX Solar is now in
talks with panel suppliers. Since the company will be using both
conventional crystalline silicon and thin film, it'll be
interesting to see if First Solar (NASDAQ:FSLR) gets a call
about the latter. Although, as we reported earlier this year,
Pakistan has been turning towards cheap Chinese solar panels to
combat high electricity tariffs and dependence on diesel
generators, which cost more to operate than solar. Pakistan has
also been moving forward on the wind power front. Back in May,
the Islamic Development Bank and the Asian Development Bank came
to an agreement on a $133 million financing deal for two wind
projects in that country.

A couple of years ago I read a report that
showed China boasting massive growth in wind farm construction.
The problem, however, was that many of these farms were not
connected to the grid. And in fact, weren't even close to being
connected. Talk about a chicken and egg situation gone bad. But
this morning, we learned that China's wind power capacity
actually linked to the grid has increased by 87 percent. This
year, just over 50 gigawatts of wind were connected, thereby
moving China closer to its goal of 100 gigawatts by 2015, and
200 gigawatts by 2020. Although few take China at its word these
days, I do believe the Middle Kingdom isn't going to just let
massive groupings of turbines sit and rust. The nation is
desperate for more power, and I have no doubt that in about
eight years, there will be 200 gigawatts of wind power helping
to keep the lights on in China.

August 17: Obama and Romney Slow Our Escape from OPEC

This is why I hate politics. . .

On the table is a plan to increase the Corporate Average Fuel
Economy (CAFE) standard to 54.5 mpg by 2025.

Although automakers put up a stink early on, most have since signed
on to get this done. However, the Obama administration is now
dragging its feet due to “continued opposition.” Gee, I wonder who
opposes making our vehicles more fuel efficient?

According to a spokeswoman for the National Highway Traffic Safety
Administration, the rule is undergoing inter-agency review and the
process is expected to be completed soon. And by soon, she means
after the election. Because the truth is, the Obama administration
doesn't want to kick the GOP beehive any more than it has to before
November.

Now It's no secret that Mitt Romney opposes the future CAFE
requirements. He claims this is an example of an over-reaching
government, and that he would instead work with manufacturers to
find ways to encourage fuel economy on the part of the consumer.
What those “ways” are however, are still unknown. He said that
trying to have the manufacturer push the product on the consumer –
something the consumer doesn't want – is not the right approach.

Yeah, I would love to meet the guy who actually has to work for a
living complain about a vehicle that gets better gas mileage. If
consumers don't want vehicles that are fuel efficient, than why does
every single car commercial on television clearly state the
vehicle's fuel economy?

Of course, I get it. It's all politics. I highly doubt that Romney
really wants to oppose something that allows us to displace enormous
amounts of foreign oil. But you know the drill. It was proposed by
this administration, so in an effort to secure votes, he must oppose
it.

And that's why I hate politics. It gets in the way of progress.

Now look, if you're you're a regular reader of these pages, you know
I'm no shill for Obama either. Quite frankly, I have zero interest
in what either side has to say during election time. It's all empty
rhetoric and bullshit designed to trick voters into believing that
their guy will save us from decades upon decades of lies, deception
and an extraordinarily unacceptable amount of fiscal
irresponsibility.

But let's be real about the CAFE issue.

At this point, no one is forcing automakers to do anything. They've
signed on!

And the bottom line is that by increasing fuel economy standards to
54.4 mpg, American consumers will save $1.7 trillion, and we will be
able to displace about 2.2 million barrels of oil per day. Or
roughly half of what we currently import from OPEC.

That, my friends, should make this a national security issue, not a
partisan one.DISCLOSURE: No positions

August 16, 2012

Energy Recovery: A "Slender" Stock

by Debra Fiakas CFA

Investors who in the small-cap sector are familiar with the
profile: a company with a great invention that ends up with a
business narrowly-focused on a particular market or customer
group. If it is a public company, the stock price is equally
thin - if it trades at all. Energy Recovery (ERII:
Nasdaq) is one of those slender stocks.

Over the last year ERII has traded in a relatively tight range
between $3.50 at the high point and $1.55 on the low side. The
stock is seemingly stranded today 29.4% off the high.
Investors have simply stayed away, barely registering 100,000 shares
per day in average trading volume. While short interest is not
particularly high - equal to just 10% of shares not held
by insiders - short sellers have persistently stalked
Energy Recovery.

Critics of Energy Recovery had zeroed in on the risks on the
desalination market. While clearly a promising opportunity in
the long-term given the shortage of potable water in the world, the
desalination market is also highly focused. Middle Eastern
countries rely to a great extent on desalination, but the Arab
Spring has slowed progress on new projects. Another key
desalination area, California, has out of the market for the time
being by fiscal issues. Credit for project developers has been
difficult during the European debt crisis. Thus
any company that puts all its eggs into the desalination basket is
vulnerable.

All those woes have overwhelmed investors’ enthusiasm even for a
product line cloaked as social redeemable. Energy Recovery
produces pressure exchangers that are installed to reduce energy
consumption in desalination plants using reverse osmosis
technology. While growing in popularity - reverse
osmosis now commands at least 40% to 45% of the desalination
market - it is a process that requires pumping large
amounts of seawater through membranes that filter out the
salt. Any process that requires the use of “large” and “pump”
together will ring up a big electric bill. Energy Recovery’s
pressure exchange device recaptures energy in the waste brine stream
and transfers it back into the incoming stream of seawater.
The action saves 60% of the energy requirement, significantly
improving the economics of seawater desalination.

Energy Recovery also has some competition. First, producers of
reverse osmosis systems are continuously tweaking the overall
design, trying to find the most energy efficient
configuration. These include IDE Technologies, Hyflux, and
Doosan
among others. Producers of the membranes, which are the
business end of reverse osmosis action, are also trying to improve
the marketability of their membranes with at least a partial fix for
energy issue. Dow
Chemical (DOW:
NYSE) leads the membrane market, followed by Nitto Denko’s Hydronautics
and Toray.

Any company faced with the twin threats of technology obsolescence
and competing products should be scrambling to dig a moat of some
kind. I cannot say Energy Recovery management actually
scrambled. However, they have moved to protect the company
through diversification. Energy Recovery acquired Pump
Engineering LLC in 2009, adding turbochargers and pumps to the
product line. The addition has given the company a foot in the
door of customers in the oil and gas industry. Now Energy
Recovery can market is energy solution for gas processing systems,
which capitalizes on the company’s pressure exchange technology.

I think this is a significant move forward for Energy Recovery,
since the oil and gas market is populated by many participants as
potential customers. It is not subject to the same capital and
credit market influences that sidelined the desalination
industry. I expect sales to oil and gas customers to help
drive the top-line in coming years.

August 15, 2012

Quick Notes on Maxwell Earnings

Tom Konrad CFA

Maxwell Technologies (NASD:MXWL)
recently reported
second quarter (Q2 2012) earnings. Revenue growth was
sluggish (for Maxwell), up 6% year on year and 1% below estimates.
The culprit was continued weakness in ultracapacitor revenue,
which down slightly from Q2 2011 because of weakness in Europe.

Earnings, on the other hand, surprised strongly to the upside, at
9 cents per share, compared to estimates of only once cent, based
on strong cost control and improving product mix. Strong
growth in Maxwell’s Chinese hybrid bus and wind turbine businesses
continue to drive profits.

Crucially, management maintained their 15% to 20% revenue
growth guidance, although now they seem to be putting more
emphasis on the bottom end of the range. However, the stock
price fell so precipitously (by about two thirds) in
response to lowered growth guidance after the Q1 2012
conference call that I believe further guidance cuts
were already priced in. The rapid stock decline was largely
driven by selling by growth
mutual funds that are now almost completely divested of the
stock. Simply maintaining
revenue guidance this quarter should count as an upside
surprise.

Putting this together, those of us who believed that the
reduction in revenue growth was, as management said,
more of a delay than a loss of future growth are likely to be
rewarded with strong stock performance this week.
According to CEO David Schramm in the earnings
call, those believers include many Maxwell employees, in
addition to the company executives (including Schramm) and board
members we knew
were buying because of required SEC disclosures.

Naysayers will continue to point to concerns arising from
Maxwell’s growing reliance on the Chinese market as its European
markets lag. Those concerns were highlighted by a Wedbush
research report by analyst Craig Irwin. Yet even Irwin
told me “Maxwell is most likely not at risk of being
outcompeted” in China. His concern was that Maxwell’s
decision to allow a subcontractor to sell own-branded
ultracapacitors to customers Maxwell is unable to reach because of
Chinese local content rules and other trade barriers increases the
risk of direct competition in China. For Irwin, that
increase risk means that Maxwell does not deserve as high an
earnings multiple as before, not that he expects Maxwell’s Chinese
business to disappear in a puff of smoke, as happened to
AMSC. (NASD:AMSC)
last year.

Maxwell’s business in China is much more diverse than AMSC’s was
(the latter relied on a single customer, while Maxwell is in
multiple markets, with many customers in each), and AMSC’s
intellectual property was mostly software, while Maxwell’s is its
much more difficult to replicate process of manufacturing its
ultracapacitor electrodes.

Even with China risk, today’s price of $7.07 fully accounts for
Irwin’s low price multiple: His price target is $8, at the low end
of the range of analysts, who have targets ranging up to $20, with
an average of $15.60. This leaves a lot of room for rapid
price appreciation.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 13, 2012

Codexis, Shell to Part Company

Jim Lane

Codexis expects to lose all of Shell funding, win freedom to
operate globally (excepting Brazil). Pyrrhic victory or the
necessary price of freedom?

In California, Codexis (CDXS)
announced that it expects to obtain rights from Shell to market its
CodeXyme cellulase enzymes to other cellulosic biofuels developers,
(excluding Brazil) and that Shell will discontinue its $60 million
enzyme R&D program, which will result in the loss of 116
full-time jobs, or a third of the company’s staff. Raizen, the
Shell-Cosan JV, will remain Codexis’ largest shareholder.

Yesterday, as the company reported Q2 earnings, Codexis CEO John
Nicols said that “given the recently announced Exclusive Negotiation
Agreement we entered into with Shell, we are expecting and are
planning for Shell to deliver notice of a reduction in funding under
our collaborative agreement by 48 FTEs effective September 1,” said
Nicols. “In addition, although we have not received any formal
notice from Shell, we do not currently expect any continued Shell
FTE funding after October 31.”

At the same time, the company reported Q2 revenues of $22.9 million,
a 12% decrease from $26.1 million in the second quarter of 2011.
Product revenue in the second quarter of 2012 was $6.8 million, down
19% Q2 2011 on a change in the timing of pharmaceutical product
orders.

Overall, the company reported a new loss of $5.5 million, or ($0.15)
per share, compared to a $5.0M loss in Q2 2011.

Let’s look at the impact.

The financial assets.

The company has $50 million in cash and cash equivalents, and has
set for itself a course to reduce operating expenses to limit its
cash burn to a maximum of $10 million per year. That will keep the
company sustainable, financially – however, severe changes in the
R&D team and structure will result, as the company transitions
from an R&D focus to commercialization.

The technology.

In total, Shell has invested $300 million in the CodeXyme cellulase
enzyme platform. The claims around the performance of the platform
are, basically, three.

Cost. So far as observers have been able to discern, Codexis
enzymes currently are less cost-effective than, for example,
Novozymes (NVZMY)
CTEC3 or Genencor Accellerase Trio, but the company contends that
the gap has narrowed sharply since Codexis licensed the Dyadic (DYAI)
C1 enzyme production technology in 2010.

There’s high confidence at Codexis (and Dyadic) that that cost
advantage can be eliminated by the time the major enzyme producers
reach the kind of costs – around $0.25 per gallon of cellulosic
biofuels – that are expected to catalyze major capacity building and
big enzyme orders.

Performance. Dyadic has been particularly active in
emphasizing that, even today, enzymes produced via its C1 technology
perform better in the higher pH ranges. Motley Fool contributor
Maxxwell Chatsko observed earlier this year that “Trichoderma
enzymes Duet (Genencor) and Ctec2 (Novozymes) cannot compete with
C1’s CMAX (Dyadic) at a pH of 6.5 – the most common fermentation pH
in the biofuels industry.”

Onsite production. C1 enzymes can be produced onsite,
eliminating the need for a transport system to receive a whale of a
lot of off-site produced enzymes. Abengoa is heading down this
route, for example, using its own enzymes produced by the C1
platform.

Potential new dance partners.

The number of available major partners available is not huge. While
Codexis was a captive of Shell, POET and DSM hooked up, Abengoa (ABGOY),
Sud-Chemie, TMO Renewables, and Mascoma went with their own enzymes,
Petrobras went with BlueSugars, Dupont (DD)
acquired Genencor, and most of the remainder (COFCO, Chemtex,
Shengquan, and Fiberight) lined up with Novozymes. Inbicon has been
working with both Novozymes and Genencor, and has tested DSM. The
others working in the space are generally still at pilot stage or in
the lab.

So, here are some potential scenarios.

1. Codexis drums up a substantial business with Raizen.

Why it’s possible. The Cosan(CZZ)-Shell
JV remains Codexis’ largest shareholder, but has not yet articulated
its cellulosic biofuels plans. In this scenario, the enzymes will be
trained upon already aggregated sugarcane bagasse at Raizen’s
formidable network of sugarcane ethanol distilleries in Brazil.

The problem. There remains much uncertainty regarding the
future of the Iogen processing technology.
2. Codexis wins a waiver to work elsewhere in Brazil.

Why it’s possible. Raizen, if it decides not to compete in
cellulosic arena, may well wish to realize some value from its
Codexis holdings by having Codexis supply to other sugarcane bagasse
technologies – or may sell its interests in Codexis outright to
other interested parties.

The problem. Assumes that cellulosic biofuels will not cut in
to Raizen’s existing ethanol market share in Brazil.

3. Codexis wins cellulosic biofuels business with Abengoa or
Chemtex.

Why it’s possible. Abengoa has already licensed the Dyadic C1
platform itself, and may simply choose to go with CodeXyme cellulase
enzymes based on performance and future potential. In turnn, Chemtex
is already a Codexis customer for renewable chemicals.

The problem. Moving out the incumbent is always tougher in
practice than on paper.

4. Codexis goes into partnership with Praj.
Why it’s possible. Since the wind-down got underway at Qteros,
Praj has been essentially dancing without an enzyme solution, and
there is an awful lot of sugarcane bagasse in India. Sud-Chemie’s
processing.

The problem. South Asia has no developers on an advanced
track towards production any time soon, and Praj had sets its sights
on a consolidated bioprocessing solution, which may lead it to
switch, ultimately, to Mascoma and its CBP technology.

5. Other wildcards emerge.

There’s TMO Renewables, developing for the China market; there are
some Novozymes clientele that may not be locked down for their Nth
plants; it is possible that one of the existing players like Inbicon
might add CodeXyme to their mix, or that companies like Lignol might
advance substantially in their journey towards commercialization.

The bottom line.

This is the hour where Codexis pivots from R&D towards
commercializing what it has got. There are some questions that
remain on how much of its R&D momentum it will be able to
maintain, post-Shell, and its prospects in the key market of Brazil.

That said, the company is in for a rough rise over the next few
months – but may well emerge as a leaner, fitter fighter in what is
expected to become a multi-billion dollar market for cellulase
enzymes.

August 12, 2012

Western Wind to Sell Company, Avoid Proxy Battle

Tom Konrad CFA

Western Wind and the Toronto Hedge Funds

Last October, Western Wind Energy (TSXV:WND, OTC:WNDEF)
received an
unsolicited takeover bid of $2.50 a share
from Algonquin Power (TSX:AQN, OTC:AQUNF)
to buy the company. Before the bid, the stock had been
trading in the $1.20-$1.25 range, but President and CEO Jeff
Ciachurski felt that it did not fully value the company’s
projects and assets, including approximately $1 per share of US
tax assets which the Canadian company Algonquin would not be able
to use.

A group of shareholders, which management identifies as
Toronto-based hedge funds, were unhappy to be unable to book a
quick profit, and took
steps to begin a proxy battle to take control of Western
Wind’s board. The intent was to take control of the
company’s board and put Western Wind up for sale.

Western Wind's Kingman I Wind
& Solar park. Photo courtesy of the company.

Proxy Battle Looms

That proxy battle would have taken place at Western Wind’s annual
meeting, due this September.

Although I’m now entering the realm of pure speculation, it
appears to me that management believes that the recent
share price fall in the wake of a disappointing
federal cash grant for the company’s Windstar
project has allowed the hedge funds and their allies the
opportunity to gain control of enough of Western Wind’s stock to
win a proxy battle. With two weeks having passed since
Western Wind CEO and President Jeff Ciachurski announced he
would
lead a delegation to Washington in the hopes of getting the full
grant re-instated, Ciachurski likely
now believes that additional grant money will not be
forthcoming, and disappointed shareholders are more likely to vote
against management in any proxy battle.

[UPDATE: A company spokesman contacted me to say that my
speculation regarding the Windstar cash grant is incorrect, and
that the delay is related to difficulty scheduling time with a
judge.]

Since Ciachurski now seems to believe he would lose a
proxy battle, and the new board would be likely to put the company
up for sale anyway, he has decided to steal their thunder, and put
the company up for sale himself. The press release mentioned
that,

The CEO of Western Wind receives a bonus within his
Compensation Agreement that pays out increased amounts of cash
on obtaining the highest share price on the sale. Western Wind
emphatically states that the CEO and Board are highly motivated
to achieve the highest sales price, and are the only parties
able to achieve the highest sale price possible.

In particular, this “increased amount” is $2 million which
Ciachurski will receive if the sale price is $3 a share or more
and an extra $1 million for each additional dollar above
$3, according to Western Wind’s 2011 proxy statement.

Likely Sale Price and Timing

If Ciachurski believes that he has a better chance of eliciting
an offer of $3 or more for Western Wind than would the new
managers after a successful proxy fight, he has a strong
incentive to conduct the sale himself. We know they would be
satisfied to sell the company for $2.50 a share, so he justifiably
worries that they might sell for less than $3, if only to expedite
the sale.

With the company already up for sale, other shareholders are much
less likely to vote for a slate of directors whose platform is to
put the company up for sale. Further, with a sale already in
progress, the Toronto funds will likely not go through the trouble
and expense of staging a proxy battle, unless they believe that
Ciachurski would cancel sale process after the annual meeting.
But since such a cancellation would destroy any trust most
shareholders have for Ciachurski, I would expect the sale to go
through (although the search for a buyer could drag on if
Ciachurski is unable to find a buyer willing to pay the magic $3
per share or more he will want to hold out for.

I expect Western Wind will sell for something more than $3 a
share. This is easily possible, since the value of the
company’s assets based on discounted cash flow is north of $5 a
share, so a protracted sale process is far from inevitable.
Even if Ciachurski wants to delay a sale, he will have
limited flexibility to do so. This morning’s press release
listed three milestones:

1. Financial completion and start of major
construction on the 30-MW Yabucoa Project, Puerto Rico. This
will add $160 million to Western Wind’s balance sheet to
approximately $560 million at time of sale;

2. Negotiating the balance of the cash grant proceeds
from treasury;

3. Completion of the mezzanine loan facility from our
senior lender in the amount of $25 million, which can repay the
high cost corporate notes;

Negotiations with the treasury are unlikely to drag on for
months: The original grant process is supposed to take only 60
days, so it seems unlikely that Western Wind’s appeal will task
that long. The completion of the mezzanine loan facility is
also unlikely to drag out for more than a month or two. That
leaves the start of construction of the Yabucoa Project, which the
company expects to begin by October, and almost certainly to begin
by December.

Champlin / GEI Acquisition

The all-share deal to acquire a 4 GW development pipeline from
Champlin / GEI Wind Holdings is almost certainly off. In a
conference call exactly two weeks ago, Ciachurski said that this
deal would be finalized “in the next two weeks.” If it were
going to be finalized at all, there would have been a mention in
today’s news release.

The stated motivation for the Champlin/GEI deal was to provide a
long term development pipeline for Western Wind, and that pipeline
is unlikely to be useful in the case of a quick sale, while the 8
million shares of stock which were to be issued in exchange for
the pipeline would lower the expected sale price. Further,
the unstated motivation for the deal was likely that Ciachurski
wanted those 8 million shares in friendly hands, supporting him in
any proxy battle. Since a proxy battle is now unlikely, this
motivation no longer applies.

Conclusion

A sale agreement will almost certainly be finalized sometime this
year, even in the event Ciachurski cannot get his $3 price.
But we will not have to wait months in order to get a lot
more information about the process, and even see some bids.
In order to avoid a proxy battle at the annual meeting, the
company will need to provide enough information to shareholders to
make it clear that a sale is virtually certain. That means
that before the late August record date for the annual meeting,
Western Wind will likely have selected two M&A advisory firms
to advise on the sale. I think it’s also likely that we will
see one or more initial bids or expressions of interest
before the end of August.

A sale may not be finalized until towards the end of the year,
but expect Western Wind shares to continue rising rapidly, as more
details of the expected sale emerge over the next few weeks.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 11, 2012

Two Weeks In Cleantech: 8-11-2012

Yesterday morning, New Jersey's Public Service Enterprise
Group announced
that it's now looking to invest up to $833 million for an
expansion of the the utility's solar power programs. This
investment seeks to facilitate the developing of an additional
233 megawatts of solar capacity. The expansion is expected to
create about 300 direct jobs annually over the next five
years.

In 30 days, Mitsubishi Motors will launch its all-new Mirage global compact
car in Japan. At a cost of between US$12,800 and US$16,500,
the 3-cylinder vehicle offers a very competitive fuel economy
of 64 mpg US. This exceeds Japan's 2015 fuel economy standards
by 20%.

The forecast
for German wind power has been raised after expansion in the
first half was greater than expected. Beating estimates by
about 200 megawatts (2,200 megawatts vs. 2,400 megawatts),
first half installations expanded by 26 percent. Of course,
only 45 megawatts of offshore wind was added in the first
half, which came below estimates. The shortfall is primarily
the result of connection delays. These connection delays are
expected to result in Germany's 10 gigawatt target to be
reached later than expected – likely by 2020. Still, 10
gigawatts of offshore wind in less than eight years is nothing
to trivialize.

Siemens (NYSE:SI) has announced
that it has secured its first contract to build a 270 megawatt
wind farm in Australia. The new power plant is expected to be
online by 2014, and when completed, will provide electricity
for 180,000 homes.

US firm RenuEn Corporation has just announced
that it has secured a 50 megawatt solar project in Pakistan.
This project will be managed by a foreign operating
subsidiary, which is joining RenuEn upon closing of the
acquisition. A 25-year power purchase agreement is in place,
with the government of Pakistan being the power purchaser.

ABB (NYSE:ABB) announced this morning that it has landed a
$55 million substation and transmission infrastructure
deal in Brazil. Brazil is actively building out its wind power
capacity with plans to install 7 gigawatts over the next five
years. This will be in addition to the 1.5 gigawatts currently
installed. I'm bullish on ABB right now and think at current
levels, the stock is undervalued.

Frost & Sullivan has recently reported that the number of
electric car charging stations in the U.S. could reach 4.1
million by 2017. Today there are about 10,000
publicly-available charging stations. If this isn't monumental
growth, I don't what is. And it speaks volumes about where this industry is
heading, despite what the partisan
slaves and naysayers would like you to believe.

For some of India's rural poor, solar saved the day during
those massive blackouts last week. This, according to David
Biello from Scientific American who wrote,
“some of the formerly energy poor – rural subcontinent –
found themselves better off than their middle-class
compatriots during the recent blackouts, thanks to village
homes outfitted with photovoltaic panels. In fact, solar
power helped keep some electric pumps supplying water for
fields parched by an erratic monsoon this year.” It's
worth noting that India has plenty of reason to embrace solar.
For one, it's becoming harder and harder for India to secure
coal supplies. As reported in the Economist, by
2017, domestic coal production in India will meet only 73% of
demand. The country's already spent $7 billion over the past
six years acquiring outside coal pits in Australia and Africa.
Now there are a lot of folks in India who rely on
diesel-powered generators, too. But with higher diesel prices,
it actually costs more to run those generators compared to
solar. And of course, for a country that was ranked as having
the world's unhealthiest air pollution, according to a Yale
study, a little extra solar is certainly going make breathing
a lot easier.

General Electric (NYSE:GE)
announced
today that it will be partnering with Enel Green Power (OTC:ENLAY)
to provide about $156 million in common equity for one of
Minnesota's largest wind farms. As is no surprise, this wind
farm will be using GE turbines. GE actually owns 51 percent of
this 200 MW wind farm now under construction in southern
Minnesota. When completed, it will help the state of Minnesota
reach its 25 percent renewable energy goals by 2025. With this
deal in place, GE's total wind portfolio is now just shy of 10
full gigawatts.

Looks like First Solar (NASDAQ:FSLR)
may be considering manufacturing in India, according to a
recent piece in The Hindu.
During an earnings conference, First Solar CEO Jim Hughes said
in regards to India, “Ultimately, if the kind of visible
demand that we expect develops in that market, that is
likely a market where we would look to put manufacturing in
place.” We've discussed the rise of solar in India in
the past, and continue to believe India could soon prove to be
one of the most lucrative solar markets on the planet. You can
read more about that here.

To date, the U.S. military has ponied up for 168 road-capable
plug-in electric cars. But according to an Air Force
spokeswoman, more are on the way. Yes, while partisan slaves
and dim-witted naysayers continue to attack the development of
electric cars – you know, those things that help us displace
an enormous amount of foreign oil and help bolster national
security, the military remains quite
bullish on electric cars.

While the future may not be so bright for the wind energy
production tax credit, wind power that is already installed in
the United States continues to show its immense value. According to Xcel Energy
(NYSE:XEL), Colorado's largest utility, on April 15, nearly
57% of the electricity that was generated in the Centennial
State came from wind power. Xcel has credited the record with
new advances in technology, including an update of its weather
forecasting ability and an upgrade of software the utility
uses to control its wind farms and fossil fuel plants.

A123 Systems (NASDAQ:AONE) has announced that it landed a
$450 million financing deal with a Chinese auto parts maker.
This infusion will likely help the company stay afloat at a
time when it continues to bleed cash. As I've mentioned in the
past, I'm a fan of the company, but I'm still not convinced
that AONE can swim upstream against the reality of cost
advantages boasted by foreign competitors. Still, today's news
catapulted the stock from yesterday's close of $0.47 to almost
$0.60 in pre-market. It'll be interesting to see how the stock
does today.

In an effort to cut its $4 billion annual energy bill and to
lessen the potential of blackouts, the Defense Department is
working with developers to build solar and wind farms
on 16 million acres of open land that currently surrounds
military bases. According to a recent DoD study, the lands
that surround military bases in Southern California alone
could generate seven gigawatts of power. That's the equivalent
of seven nuclear reactors, or enough to power more than five
million homes.

Although sales of SUVs have fallen over the past few years,
mostly due to the fact that it can cost well over $100 to fill
one up, Americans still love these vehicles. It's why smaller,
crossover SUVs continue to sell. And to make sure the electric
car segment doesn't miss out on an opportunity to convert
internal combustion lovers to electric, a number of automakers
are electrifying SUVs. Toyota has its new RAV4 EV, which goes
on sale this month, and Ford's new C-Max Energi comes in both
conventional hybrid and plug-in hybrid electric. The
conventional hybrid model delivers a stellar 47 mpg and the
electric model offers the highest electric-only speed of any
plug-in hybrid on the road. So is this the new trend in
vehicle design for SUVs? Brad Berman from Plugincars.com dives
into thi

August 10, 2012

Solazyme, Gevo, Amyris earnings, outlook: the 5-Minute version

Jim Lane

As Solazyme, Gevo and Amyris report on results for Q2, update
forward guidance – what does the data reveal about demand, supply
of advanced biofuels and co-products?
We digest down analyst reports, company comments into a 5-minute
summary of “news you can use”.

In California and Colorado,
the newswires have been working overtime this week in advanced
biofuels, as several industry titans reported their latest
quarterlies and subjected themselves to public scrutiny, which
sometimes resembles the Puritan practice of mounting minor offenders
in the public stocks and pelting them with rotten eggs and tomatoes.

But it was all quite civil this week in biofuelsland, as the
companies generally reported that they remain generally on track in
terms of the direction and timing of their long-term journeys toward
cash flow, and strategic partners continue to provide help with
capital and offtake.

Cash, production quantity, offtake and price/margin – these have
happily become the new metrics, instead of government R&D
contracts, VC financings, and MOUs for future developments.

General themes: as expected, early markets remain focused on
higher-value opportunities, fuels (road, aviation or other) are an
aspirational goal awaiting the construction of larger capacities and
the lower per-gallon costs and assurance of supply that comes with
maturity and scale. Analysts are in general agreement on Amyris (AMRS);
Gevo (GEVO),
all are generally bullish, some more so than others; with Solazyme (SZYM),
Piper Jaffray is somewhat pessimistic but overall the consensus is
broadly quite positive.

Future capital raises for capacity expansion are expected this year
and next for Solazyme and Amyris, with Gevo just completing a raise.
Strategic partners continue to arrive with impressive balance
sheets: Totral for Amyris, Toray and Sasol for Gevo, Bunge for
Solazyme.

Let’s look at the companies one by one for signs in their individual
journeys, and some review of the state of play as a whole. Analysts
in the mix include the estimable Rob Stone and James Medvedoff from
Cowen & Co, Mike Ritzentheler from Piper Jaffray and Pavel
Molchanov from Raymond James.

Amyris key takeaways.

Cash. $30M from Total was totally welcome; ultimately, “our
cash burn projections imply another equity raise around year-end
2012. The new Total funding package may push that out, so our
updated model reflects equity issuance in 2Q13.”

Offtake: “Building on their long-standing partnership, Amyris
and French oil major Total (TOT) are amending their diesel
collaboration to firm up and accelerate R&D funding. The new
provision is Total’s commitment to fund up to $82 million over three
years, including a $30 million down payment in 3Q, via convertible
debt (1.5% coupon, due 2017). To be sure, this project – like
Amyris’ overall business plan – is behind schedule. Last year, the
aim was full-scale production start-up in 2013-14. While that’s no
longer realistic, Total’s reaffirmed commitment is encouraging.”

Price/margin: Owing to start-up during cane off-season, “It
may be mid-2013 before performance/cost data at scale can be
reported” based on the primary feedstock.

Gevo key takeaways.

Cash. “Gevo reported cash and cash equivalents on hand of
$38.6 million as of June 30, 2012. The concurrent public offerings
of common stock and convertible senior notes generated net proceeds
of $98.8 million in July 2012.”

Production quantity. “Management announced product shipment, and
reiterated their expectation to exit FY12 at a 1 million gallon per
month run rate.” ”We still expect Redfield to be up and running in
Q4 2013, about a year behind the original plan. However, in order to
do so, construction must begin within the next few months (Luverne
took 12 months, but was less than half the size).”

Gevo’s Ryan adds: “On the chemical side, it’s very positive. Within
the speciality chemicals that Sasol will be serving, there is lots
of demand, positive feedback. In the paraxylene market, we continue
to see an increase in momentum there and now talking to others in
that supply chain to develop the process, but it will not be
commercialized in the next year or two.”
Price/margin: “Gevo’s fixed margin offtake deals largely
insulate it from corn cost risk. This summer’s record-high corn
prices and awful ethanol economics can actually give Gevo greater
leverage in signing up ethanol producers as joint venture partners.
That said, Gevo is still focused on transitioning to cellulosic
feedstocks.”

Litigation: ” Regarding the IP
dispute with Butamax, we continue to believe that Gevo will be
able to operate unencumbered…and perhaps the new preliminary
injunction filed by Gevo will catalyze a settlement.

Solazyme key takeaways

Cash. Solazyme ended 2Q with cash of $195 million…Solazyme
should exit 2012 with cash of $140+ million, and we assume a round
of equity issuance in mid-2013, ahead of a likely acceleration in
capital spending. “Management reiterated their expectation that
their contribution to the 50/50 Bunge (BG)
JV would be $72.5 million, and are hopeful that the BNDES will fund
60% or more of the Moema capex, but the visibility won’t come until
mid-2013.”

Production quantity. ”In April, Solazyme finalized its JV
with agribusiness giant Bunge for its first Brazilian
production facility to be co-located at Bunge’s Moema sugar mill…The
plant, with capacity to produce 100,000 metric tons of tailored oils
annually, is expected to come on line in 4Q13.”

Offtake: Algenist sales continue to impress, with 1H12 sales
exceeding the total of 2011. Other than a 3Q dip in Pentagon-related
fuel sales, there is no change in outlook. Ritzenthler adds:
“Underweight rating reflects our view on…building capacity ahead of
firm demand [for volume products].

Price/margin: “No surprises in 2Q12. Revenue of $13.5
million, flat sequentially, was within 1% of our estimate, and the
mix between product sales and R&D/licensing also stayed
consistent. ”

Timeline to cash flow positive: “On track for positive cash
flow by mid-2014.Our projections indicate that Solazyme’s operating
cash flow will turn positive once Moema fully ramps up, which could
be as early as late 2014.”

The bottom line: Management guides down revenues for FY12,
primarily on the loss of government-funded projects. No upgrades or
downgrades from analysts.

The Wanxiang Transaction Is Not Necessarily A Permanent Solution For A123's Problems

John Petersen

On Wednesday A123 Systems (AONE)
announced the execution of a Non-binding Memorandum of Understanding
with the Wanxiang Group that will, if successfully implemented,
restore A123 to a sound financial footing. Since the basic deal
terms are a good deal more complex than the reports one reads in the
mainstream media, I think a drill down into the detail may be
helpful for investors who want to understand what a restructured
A123 will look like. The critical document for this analysis is the
MOU included as Exhibit
99.2 to A123's recent report on Form 8-K.

A block of warrants that will, if exercised, generate up to
$175 million of additional equity.

The bridge loan facility will be secured by substantially all of
A123's assets and has been separated into two tranches. The first
$25 million, which includes $15 million in cash and a $10 million
letter of credit, will be immediately available to A123 upon
execution of definitive agreements. The $50 million balance will be
funded when certain first tier conditions are satisfied, including:

receipt of a favorable determination from the Committee on
Foreign Investment in the United States;

receipt of Chinese government approvals;

retention of the R&D and engineering teams; and

other usual and customary conditions.

Barring a mass exodus of the R&D and engineering teams, I think
there's a high probability that the entire $75 million bridge loan
facility will become available to A123 over the next couple months;
Wanxiang will obtain a reasonable level of de facto control;
and A123 will get enough breathing room to finish a more
comprehensive restructuring.

The senior secured convertible note financing will be more
complicated and time consuming. Wanxiang's commitment to buy $200
million in notes is subject to several second tier conditions,
including:

reasonable assurances that A123's government grants and tax
credits will remain available;

stockholder approval of the restructuring transaction;

conversion or repurchase of at least 90% of $143.8 million in
convertible notes that were issued in April 2011;

conversion or redemption of the $50 million in convertible
notes that were issued in May 2012;

an increase of the number of directors from seven to nine and
the election of four directors designated by Wanxiang;

compliance with Hart-Scott-Rodino and other antitrust laws;
and

continued listing of the Common Stock on Nasdaq.

It's clear from the MOU that the retention of A123's government
grants and tax credits is a critical valuation issue. If the grants
and credits remain in place, the exercise price of the bridge
financing warrants will be $0.425, but the exercise price will be
reduced to $0.17 if the grants and tax credits are lost. Similarly,
the conversion price of the senior secured notes and the exercise
price of the related warrants will be $0.60 per share if the grants
and tax credits remain in place, but they'll both be reduced to
$0.24 if the grants and tax credits are lost.

Under the circumstances, I think A123 will probably get the
necessary government assurances and approvals. It should also be
able to negotiate the redemption or repurchase of its outstanding
debt on reasonable terms. While investors may grumble, particularly
if the proxy statement for the required stockholder approvals
includes a reverse split to solidify A123's Nasdaq listing, there
really isn't an alternative so they'll eventually go along.

While the series of transactions have been described as a $450
million rescue in media reports, the only funds Wanxiang will be
required to invest are $75 million for the bridge loan facility and
$200 million for the senior secured convertible notes. If one
assumes that no additional shares will be issued in connection with
A123's outstanding convertible debt, the bridge loan warrants will
give Wanxiang the power to obtain 51% voting control by tendering
that debt in payment of the exercise price. While conversion of the
notes would increase Wanxiang's voting control to 75% if it chose to
exercise its rights, a reasonable risk manager could conclude that
voting control coupled with $200 million in secured debt was a more
advantageous position for Wanxiang given the uncertainties of A123's
business.

I've always believed that prudent investing begins with a worst case
analysis. In the A123 - Wanxiang transaction I believe the worst
case is a $75 million equity infusion that will increase A123's book
value to $188.8 million, or $0.544 per share, and give Wanxiang
voting control. While the $200 million senior secured convertible
note financing will increase A123's liquidity, a substantial portion
of the cash will be used to redeem or repurchase A123's other debt
securities.

I believe it's safe to assume that the holders of the $143.8 million
in convertible unsecured subordinated notes that A123 issued in
April 2011 will be willing to accept a haircut in connection with an
early redemption. I don't, however, have any basis to predict what
the haircut might be. While holders of the $50 million in
convertible unsecured senior notes that A123 issued in May 2012
might also be willing to accept a haircut in connection with an
early repayment of the $39.6 million balance, I'd expect their
negotiating position to be more aggressive. In a worst case
scenario, the bulk of the $200 million in proceeds from Wanxiang's
senior secured convertible note financing will be used to retire
junior debt.

On balance I believe the Wanxiang transaction is a positive
development for A123's stockholders because it will stop the
issuance of additional common shares under the 2012 notes and help
alleviate the intense selling pressure that's resulted from the
issuance of 23.4 million new shares since June 26th. It will also
restore A123's stockholders equity to a more reasonable level and
give the company time to restructure its affairs. The transaction is
not, however, a permanent solution to A123's problems and any number
of uncertainties are yet to be resolved.

While I don't see anything in the deal structure that would justify
a rush to the exits. I believe investors who decide to hold or buy
A123's stock must pay careful attention to future releases that
quantify the current uncertainties. This is not a good time for
irrational exuberance.

August 08, 2012

There are Always Buyers

There are Always Buyers – even for Clean-tech deals. An Update from the Street.

In the movie Wall Street, Michael Douglas plays a greedy, ruthless banker who hangs everyone out to dry in order to win. His motto is “greed is good”. Well, his character’s antics have turned out to be more reality than fiction as we uncover more real life blunders of Wall Street bankers. What does this have to do with our current markets? Everything, really. Since 2008, only select stocks have performed well in the overall market and the clean tech sector has been obliterated. It seems the big banks have been playing roulette with client money every chance they get. This has affected investor confidence and is reflected in lower stock prices and trading volumes across the board. Added onto world economic woes, fear and doubt have been instilled into the markets.

While many may be saying this is not the time to get into the markets others, like Warren Buffett are licking their chops. They see opportunities everywhere and at bargain prices compared to just a few years ago. Where does an investor like Warren Buffett get his confidence to buy when everyone else is stuffing their mattresses? From what I have read, he believes in market cycles and through his experience believes that the markets will recover and still be the best place to put his money for the long term.

Before you get too depressed, think about this. Because of the greed factor, many Wall Street types have historically created all kinds of products to make money in the stock market, such as, Mutual Funds, Junk Bonds, Derivatives, and ETF’s just to name a few. All of these are products that were “invented” by some Wall Street guru or mathematician who figured out a new way to make money in the market. Trust me, they will think of something else to get money to come back to the market and it will turn around again. Eventually, investors will pour back in and look for new ways to invest because they want to make big bucks too. They want a return on their investment not just cash under the mattress. It is just a matter of time.

So how does a new venture find the capital it needs, and how do existing companies find investors to move their stock prices up? The answer is complicated. “Show me the Money” – another famous movie quote rings true today – finding those pockets of money is harder than ever before. But not impossible. Here is what we are hearing: Best sources of funding are now from private equity groups, family offices, and corporations with innovation funds looking for smaller companies to invest in. Keep your rolodex fresh with all your contacts and utilize them all when looking for capital. Money is much harder to come by these days for junior and start-up companies, but for the right venture, the money will come forward eventually if you are persistent and on top of your game.

August 07, 2012

Finavera to Sell Wind Project for Three Times Its Market Cap

Tom Konrad CFA

On July 23rd, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF)
announced
a
deal to sell its 77 megawatt Wildmare Wind Energy Project
to Innergex Renewable Energy (TSX:INE, OTC:INGXF.)
The sale
will come as a great releif to Finavera’s long-suffering
shareholders, who have seen the stock halve in value since the
start of the year.

The $22 million received from Innergex for Wildmare should put an
end to shareholder dilution, since it is sufficient to pay off
Finavera’s entire $11 million debt burden and allow Finavera to
advance the company’s other projects. As CEO Jason Bak said,
“This transaction illustrates the significant asset value Finavera
has created for shareholders and provides a strong return on our
investment in the development of wind energy for British Columbia.
This transaction creates a stable platform for long term growth
and allows Finavera to recycle capital and fund the ongoing
development of its remaining portfolio of projects.”

The money, along with another $8.8 million which the company
expects from its partnership in an Irish wind farm moves Finavera
out of the asset-rich and cash poor renewable developers which
have been languishing for the lack of funds, and firmly into the
camp of asset rich firms with strong balance sheets able to profit
from the availability of cut-price development projects.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 06, 2012

Geothermal in South America: Major Prospects for Development

With climate threats and increased energy demand, South American
countries are set to develop their vast geothermal potential. Will
developers be able to acquire investment and favorable policy?If any part of the
world should be concerned about the effects of climate change, it
is South America. Despite contributing some of the lowest
emissions globally, many of the countries in the region are

As South America’s population is expected to rise
72% by 2035, the impact of climate change grows more significant
each day. Governments are reacting with renewable energy
development — and geothermal power has several major
prospects.

Geothermal presents a major opportunity throughout
South America, but exploratory drilling has been limited.
According to the ESMAP report, the range of geothermal capacity
estimates is quite broad. Though expectations may be uncertain,
many regions are hopeful that exploration will reveal something
more.

‘Extrapolating from the experience in the US, where
there has been a large amount of exploratory drilling, the
potential of conventional geothermal resources in Latin America
might be as much as 300 TWh per year,’ the report states.

The most viable resources are thought to be located
along the Pacific Rim, which ranges from Mexico to Chile. Key
spots in the Caribbean islands also carry some potential,
according to researchers.

Policy Push

Several South American countries have spearheaded
policy incentives to move renewable energy plans forward.
Countries of note include Argentina, Chile and Peru, according
to the 2012 Geothermal International Market Overview
Report released by the Geothermal Energy Association
(GEA).

Argentina implemented a feed-in tariff (FiT) plan
for geothermal projects, with a 15-year entitlement period after
the plant is brought online. The plan also includes a goal to
reach 8% of renewable production by 2016.

According to the GEA, ‘Though a 1998 law supported
wind and solar generation, geothermal did not become eligible as
a renewable energy source until 2007. ... In May 2009, the
Genren Program was launched, aiming to purchase and incorporate
1000 MW from renewable energy plants, 30 MW of which is to come
from geothermal energy.’

With geothermal potential of up to 16,000 MW, the
Chilean government is ready to take advantage of its untapped
renewable sources. To drive renewable development, the Chilean
National Energy Commission partnered with the US Department of
Energy (DOE) to create the Renewable Energy Center in Chile.
According to its website, the DOE uses the facility to compile
global renewable energy best practices and techniques to then
use in the region.

‘The Chilean center will serve as a clearinghouse of
information and analytic tools and a leading source of expertise
on renewable energy technologies and policies for Chile
and, once it is up and running, for the region. It will also
help research, develop and promote non-conventional renewable
energy projects, and will serve as a source of information for
investors and policymakers.’

Chile’s non-conventional renewable energy law
enforces all utilities with a total capacity of 200 MW and
greater to demonstrate that at least 10% of their energy comes
from renewable sources. After 2014, this enforcement will
increase by 0.5% annually until 2024, when it finally reaches
10%, according to the GEA report. Chile also enforces its law of
geothermal concessions, established in 2000, which regulates
exploration and permitting of geothermal projects. In response
to this favorable policy, a total of 83 geothermal exploration
concession requests are under review as of June 2012 at
Chile’s energy ministry, according to Business News Americas.

Peru is thought to have nearly 3000 MW of geothermal
potential, none of which has been exploited. The country
currently draws most of its energy from natural gas, hydropower
and fossil fuels. Recognizing its need for energy development,
the Peruvian government has set FiTs and tax incentives for
renewables. It has also held auctions for contracts, including a
recent 500 MW tender. Its goal is to generate 5% of its
electricity from renewables by 2014.

Other South American countries have also recognized
the need for clean energy and have implemented favorable
policies. According to the International Energy Agency (IEA),
Bolivia began its efforts in 1999 with grant incentives for
rural renewable projects, and in 2000 passed a rural
electrification project. In 2005, Bolivia passed the Rural
Electrification Decree that promotes collaboration between
private energy companies and government agencies to establish
renewable projects.

Where is the Investment?

Though much investment has come from private
funding, the Inter-American Development Bank has been a key
player in South America. It has a five-year target to invest 25%
of its loans toward climate-related projects, and it recently
established the Emerging Energy Latin America Fund II.

According to its website, ‘IDB’s participation will
consist of a senior A loan of up to US$30 million with a tenor
consistent with the life of the fund (expected at 10 years),
including a five-year commitment period. The repayment structure
and the scope of security will be defined during due-diligence.’

The fund, a successor of the $25.2 million CleanTech
Fund, is expected to reach $150 million. According to Andres
Ackerman, an IDB project team leader, the fund was created due
to major expected energy demand increases in the region
— 75% by 2030 — half of which could be generated by
renewables.

‘This financing is part of the IDB’s commitment to
develop mechanisms to support long-term funding of renewable
energy and clean technology projects in the region, which
stimulate innovation, job creation and green economic growth,’
said Daniela Carrera-Marquis, head of the financial markets
division at the IDB’s structured and corporate finance
department (SCF).

Race To Be the First

Though there are no plants currently online in South
America, several projects are nearing completion. Argentina
could technically claim groundbreaking fame with its
demonstration project built in 1988 in the volcanic Copahue
region — a site that has been explored for geothermal
development since the 1970s. Decommissioned in 1996 due largely
to high electricity prices, the 670 kW project used 171°C
sources at depths of 800 to 1200 meters.

Near the decommissioned demonstration plant is a new
potential frontrunner — the 30 MW Copahue project in development
by Earth Heat Resources. According to the company, the project
has the potential for massive expansion after the success of the
initial 30 MW plan. Now in its second phase of development, the
project is expected to be completed this year.

‘This second stage study will encompass many
elements of the upcoming program for this year including
drilling, civil works, other facilities, engineering and
transmission line issues,’ said Earth Heat Resources managing
director Torey Marshall. ‘This milestone will confirm the
location of wells, location of roads, location of
potential plant sites and transmission line locations; an
enormous step in our development of the Copahue Project.’

Earth Heat Resources recently signed a power
purchase agreement (PPA) with Electrometalurgica Andina SAIC for
an initial 30 MW per year. It has also signed a letter of intent
with Xtrata Pachon SA to purchase 50 MW per year, with the
potential for further expansion. Xtrata sees the potential in
geothermal and is eager to get involved with sustainable,
renewable projects in Argentina.

‘We are committed to finding the best environmental,
social and economic solutions in support of our potential future
investments in Argentina, and look forward to working with Earth
Heat in the first geothermal plant in the country,’ said Xavier
Ochoa, Pachon’s general manager.

Fast on its heels is Enel (ENLAY.PK)
Green Power’s Cerro Pabellón geothermal project located
in Pampa Apacheta, Chile. With eight geothermal concessions in
Chile — the most recent acquisitions include Colorado, San Jose
I, and Yeguas Muertas — Enel is eager to tap the nation’s vast
potential. The 50 MW project recently received environmental
approval and is ready to move forward.

‘The country’s geothermal potential is one third of
the installed geothermal capacity worldwide,’ explained Enel
Green Power CEO Christian Herrera. ‘Electricity generation
through geothermal energy not only helps meet the growing energy
demand in the country, helping to reduce dependence on imported
fuels, but [it’s] also a concrete contribution to reducing
greenhouse gas emissions, contributing to the mitigation of
global warming.’

In development but further from completion,
renewable energy firm GGE Chile submitted an environmental
impact assessment (EIA) for a $330 million geothermal project
planned for its San Gregorio concession in southern Chile.
Expected to break ground in 2013, the 70 MW Curacautin
geothermal project will consist of 10 drilling platforms, 14
production wells and 11 reinjection wells, and is scheduled to
come online in 2016, according to Business News Americas.

The nearby Mariposa Geothermal System owned by Alterra
Power Corp (AXY.TO, MGMXF.PK) is located near an
active volcanic region in the Chilean Andes Mountains.
Exploration for the project began in the early 2000s, when great
potential was found in the area. According to the project
website, based on the exploration results, the inferred resource
estimate is 320 MW available over 30 years. To date, slim holes
have been drilled, and 200+°C resources have been found at
the top of the wells; additional holes will be drilled to
determine further resources. A 50 MW plant is in development and
expected to be completed by 2016, and Alterra is searching for
partnerships to continue exploration and development at the
Mariposa site.

A key factor to this project is the nearby
hydropower projects. Developers are hopeful for a collaborative
effort to build transmission systems to feed the renewable
resources to the Central Power Grid.

Northern Influence

Facing many of the same issues with climate change
and population growth, Central America and the Caribbean have
embraced their geothermal resources much more than their
southern neighbors. According to the GEA report, a majority of
the countries in Central America have developed a portion of
their geothermal resources.

‘El Salvador and Costa Rica derive 24% (204 MW) and
12% (163 MW) of their electricity production from geothermal
energy respectively. Nicaragua (87 MW) and Guatemala (49.5 MW)
also generate a portion of their electricity from geothermal
energy,’ said the GEA’s report.

The potential for further development of Central
America’s geothermal resources remains significant, and the
geothermal potential of the region has been estimated between
3000 MW and 13,000 MW at 50 identified geothermal sites.

The SIEPAC (Sistema de Interconexion Electrica para
America Central) transmission interconnection has greatly
influenced this region’s geothermal development. In an effort to
reduce electricity costs, countries are able to develop their
geothermal sources and spread the renewable wealth throughout
the region at competitive prices.

Electricity costs have influenced geothermal growth
on the Caribbean islands. Compared with current fossil fuel
production at $0.24/kWh, geothermal costs $0.05/kWh, according
to the World Bank.

In sharp contrast, South America has strayed from
transmission interconnections. According to the GEA report,
there have been recent issues regarding the flow of energy
across national borders, which have led to underdeveloped,
rarely used and cut transmission lines. This dissension has
resulted in increased blackouts and worker strikes. Though this
may have held back development, the current climate crisis and
the increased need for clean energy have spurred a government
response to develop the massive geothermal resources throughout
the region.

According to Geothermal Resources in Latin America
and the Caribbean, a report released by Sandia National Labs and
the US DOE, ‘With [gigawatts] of estimated power potential,
geothermal energy can and should supply a portion of the
additional capacity required [in Latin America].’

Meg Cichon is an
Associate Editor at RenewableEnergyWorld.com,
where she coordinates and edits feature stories,
contributed articles, news stories, opinion pieces and blogs.
She also researches and writes content for
RenewableEnergyWorld.com and REW magazine, and manages REW.com
social media. Formerly, she was an Associate Editor of
ideaLaunch in Boston, MA. She holds a BA in English from the
University of Massachusetts and a certificate in Professional
Communications: Writing from Emerson College.

August 05, 2012

11 Clean Energy Stocks for 2012: August Update

Tom Konrad CFA

July Overview

July
was a good month for my Clean
Energy model portfolio. Since the last update, these 11
stocks are up an average of 3.3%, with a year to date return total
return a tiny loss of -0.5%. While it's never pleasant to be
down for the year, it's helpful to compare this performance to that
of the most widely held clean energy ETF, the Powershares Wilderhill
Clean Energy ETF (PBW),
which was down 8.7% for the month, and down 21% year to date.
All in all, it has been a miserable year so far for most clean
energy investors, and I'm happy to say that my model portfolio has
managed to avoid almost all of that misery.

The broader market, as measured by the Russell 2000 index (^RUT),
had a weak July as well, down 2.5% for the month, but it is still up
7.1% for the year. With the broad market up, my hedged
portfolio, which includes a put on the broad market ETF SPY, is
lagging the model portfolio, with a total loss of -6.5% year to
date.

I believe the model portfolio's year to date out performance is
mostly due to avoidance of the moribund solar sector, which has
declined 37% since the start of the year, even after a 63% decline
in 2011, as measured by the Guggenheim Global Solar ETF (TAN).
However, TAN gained 3% since the last update, even as PBW declined,
so this month's strong performance is due to other factors.

News Driven Returns

Company-specific news events drove the model's July
performance. New Flyer Industries (TSX:NFI / NFYEF),
Western Wind Energy (TSX:WND, WNDEF)
and Finavera Renewables (TSX-V:FVR, FNVRF),
which were up 25%, 35%, and 23% for the month all gained because of
significant news releases. This more than compensated for bad
news from Lime Energy (LIME),
which lost 40% (see below for details.)

While those four stocks were charging ahead or falling off a
cliff, the rest of the portfolio was more sedate.

Europe-based stocks Veolia (VE),
Rockwool (RKWBF),
and Accell Group (ACCEL.AS)
all declined modestly (-8%, -4%, and -4%) becaue of continued
concerns over the Euro crisis. Nevertheless, these three
remain positive or flat for the year (2%, 8%, and 0%.)
Domestic companies Waterfurnace Renewable Energy (TSX:WFI
/ WFIFF), Waste Management (WM)
and Honeywell (HON)
produced modest gains of 4%, 5%, and 8%, partially offsetting the
losses among the European companies and Canadian Alterra Power
(TSX:AXY / MGMXF),
which gave back -5% after a strong showing in June.

I've written extensively about three of the big movers elsewhere, so
I will just provide a quick summary for each and links:

During the month, I bought Western Wind (both before and immediately
following the sale announcement), Finavera (right after the wind
farm sale), and Lime, where I think the current price has discounted
all the very real accounting risk and then some. I also
re-entered Veolia at $10.36, having sold in June when the stock was
above $12. The decline in price and some progress cleaning up
the balance sheet combined to make this stock attractive to me
again.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 04, 2012

Cosan: No Haven for Ethanol Investors

by Debra Fiakas CFA

The stark reality of basing
their business model on a food commodity has been brought into sharp
focus for ethanol producers. The drought settling across the
U.S. corn crop is helping drive up corn prices for hog producers,
chicken farms and ethanol plants alike. Investors who simply
must have a position in ethanol might think the sugarcane-based
ethanol producers could offer a safe haven against the supply and
margin squeeze that is certain to hobble GreenPlains Renewable Energy (GPRE:
Nasdaq), Pacific
Ethanol (PEIX:
Nasdaq) and Poet (private), among others relying on corn
feedstock.

Think again! Cosan
Ltd. (CZZ:
NYSE) is one of Brazil’s leading ethanol producers and sources
sugarcane from other farmers as well as its own farms. After
strong growth at the beginning of calendar year 2011, adverse
weather conditions got the best of Cosan as well. Crushed
sugar cane volumes declined year-over-year as did ethanol and sugar
volumes. In the fiscal year ending March 2012, Cosan reported
a 10.9% gross margin, well below the prior fiscal year profit of
16.1%.

Cosan is not a unique case in Brazil. In calendar year 2011,
Brazil produced 5.6 billion gallons, representing 25% of the world's
total ethanol used as fuel. This compares to 7.5 billion
gallons in 2010. As the year unfolded politicians began
getting nervous. In August 2011, in anticipation of further
ethanol production declines, the Brazilian government took measures
to prevent shortages by lowering Brazil’s gasoline blend requirement
from 25% to 20%. Nonetheless, in the dramatic volume decline,
Brazil is struggling to meet domestic demand for ethanol.

Thus it is not just the use of food commodities for ethanol
feedstock, it is the use of crops that are particularly susceptible
to weather extremes. It is clear the renewable energy sector
has a long way to go to perfect technologies and business
models. Unfortunately, cellulosic ethanol technologies remain
illusive and drought resistant crops require years to perfect.
In the meantime, investors could simply accept what has not been
fixed. Use seasonal and cyclical influences to establish
long positions in corn and ethanol at value prices….or take profits
in short-positions previously established at cycle peaks.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small
Cap Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

August 03, 2012

While Tesla is Heading into the Valley of Death, Kandi has Already Crossed

Tom Konrad CFA

My friend and frequent electric vehicle (EV) critic John
Petersen recently
worried that Tesla (NASD:TSLA) shareholders now buying the
stock because of the launch of the company’s new Model S were doomed
to lose money, since the company is just entering the “trough
of disillusionment,” as shown in this stylized diagram of the
losses a company suffers in the Valley of Death from Osawa
and Miyazaki.
Although Petersen is relentlessly negative on EVs, he has a great
depth of experience with launching new technologies, and investors
ignore him at their peril.

Fortunately, Tesla is not the only EV game in town, and there is
another EV company at a much more auspicious stage of the product
cycle. That company is Chinese mini-EV manufacturer Kandi
Technologies (NASD:KNDI.) Incidentally, Kandi is the only EV
company Petersen has ever written a positive article
about.

Model S: Fast like a hare. Photo courtesy Tesla
Motor

Today, Kandi Technologies announced that they had signed
a framework agreement with the government of
Weifang Binhai Economic Development Zone in Wei Fang City of
Shandong Province under which Kandi will build a factory in the
Zone. The Zone will provide support in the form of
infrastructure, promotion, and incentives in order to help the
company sell no less than 20,000 EVs per year in Shandong
Province. The factory will have capacity to manufacture key
components of up to 100,000 vehicles per year, and is expected to
be completed within two years.

According to Wikipedia, Shandong province is one of the
most populous and affluent in China.
Shandong is also new territory for Kandi, which recently
signed a deal to sell 20,000 EVs for a leasing program in
the city of Hangzhou in Zheijiang Province. More details of
that deal emerged yesterday, when it was said
(unfortunately in
Chinese PDF only) that the order would proceed with 1000 EVs
per month for September to December 2012, and 2000 EVs per month
from January to August 2013. Since we can expect a gross
profit of about $1300 to $1700 per vehicle, that should amount to
an additional $0.15-0.20 a share profit in 2012, and additional
$0.60 to $0.80 cents a share in 2013.

The Kandi KD5011 Mini-EV to be leased
in Hangzhou. Kind of looks like a tortoise, doesn't it?
Photo by Marc
Chang.

Kandi was already profitable on the basis of its growing off-road
vehicle business. It earned $0.20 a share over the last 12
months with only minimal EV sales. With rapidly growing
sales of EVs underwritten by Shandong and Hangzhou, Kandi has had
the kind of help across the Valley of Death that Tesla can only
dream of.

Tesla CEO Elon
Musk may expect
the company to sell 20,000 EVs in 2013, but such sales
depend on fickle consumers. Analysts expect a loss of $2.44
a share this year, and a profit of only $0.63 a share next year.
Further, it will cost you over $30 a share to buy TSLA,
which has a book value of only $1.46 a share.

Meanwhile, Kandi already has an order to sell 16,000 EVs in 2013,
and more are likely to follow. I expect the company to earn
between $0.40-$0.60 a share in 2012, and $1.20 to $2.00 a share in
2013. It only costs $4.05 to buy the stock as I write
(although the stock has been advancing rapidly on the recent
news). Kandi’s book value easily exceeds Tesla’s at $2.14 a
share.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 02, 2012

Veolia Cleaning Up Balance Sheet

Tom Konrad CFA

On Thursday,
Veolia Environnement (NYSE:VE)
closed a deal to sell its solid waste business for $1.9 billion.
This is part of its ongoing effort to reduce debt and cost of
operations by selling assets worth $6.14 billion, which the company
expects to complete by the end of 2013. Last year, Veolia took
the first step in this program by selling its UK water business,
also for $1.9 billion.

I’ve long been attracted
to Veolia for its green credentials and high dividend yield.
The company paid a euro 0.70 ($0.85) dividend in 2012, and
will pay the same in 2013, for a yield of 8.2% at the
current price of $10.33. However, the company’s high debt
($23.7 billion after the recent sale, which it plans to reduce to
$14.7 billion by the end of 2013 through a combination of
asset sales and retained earnings) and negative free cash flow
have made me wary.

Debt is still higher than I would like, and free cash flow is
still negative, but with the stock trading at a forward P/E of 8
and at less than two thirds of book value, this seems a
good time to re-enter this high yielding company before it
completes it’s restructuring and attracts more cautious income
investors.

I re-purchased Veolia today (I sold a month ago, when the stock
was over $12, and the recent asset sale had not yet been
announced.) The company bears watching, since there is no
guarantee it will continue divest assets and cut operating costs,
but a successful restructuring leading to less debt and
positive cash flow will make Veolia into an attractive stock
worthy to be among the core of stable green income stocks in my
portfolio.

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.

August 01, 2012

2012 Modern Energy Forum

We are happy to have The Modern Energy Forum as an advertiser on AltEnergyStocks.com once again. The 2012 Modern Energy Conference will be held in Denver from September 5 to September 7, 2012. Details of the the conference will be posted on AltEnergyStocks.com soon - for now, we encourage you to visit their site and have a look.

On the Edge of the Subsidy Cliff: Will the US PTC Expire?

Steve Leone

Sen. Mark Udall

Colorado Senator
Mark Udall is persistent by nature. He's a mountain climber who
has scaled some of the world's most daunting peaks, from Mount
McKinley in Alaska to Mount Aconcagua in the Andes. That dogged
pursuit has served him well in his recent career spent
navigating the perilous cliffs of Washington's Capitol Hill. And
now he has at least one more mountain to climb — the seemingly
intractable extension of the Production Tax Credit (PTC), the
wind industry's defining subsidy and the financial tool that has
helped his rugged home state become a leader in wind energy
generation and wind manufacturing.

Udall’s approach is equal
parts steady ascent and unflagging determination. His base camp is
the Senate floor and from there he plans — to critics, annoyingly
so — to make the extension of the PTC a daily topic of discussion.
In a town notorious for the filibuster, the Democrat’s approach is
slightly different in that he’s scheduled time each morning for
when Congress is in session. And so it will be that every morning
from now through the August recess, Udall will remind his
colleagues why the PTC has gained widespread bipartisan support
across much of the country, and why Congress should extend the
soon-to-expire tax credit soon enough to keep the industry from
contracting — and taking jobs with it.

This is the same refrain
that has echoed through the halls of Congress and numerous
statehouses since the end of last year. The industry’s growth,
which is expected to surpass 10 GW of new installations through
the end of this year, is closely aligned with the PTC, which pays
out 2.2 US cents per kWh generated. That credit has helped to make
wind energy a lucrative and worthwhile pursuit for developers and
utilities alike, and its relative stability over recent years has
allowed projects to move ahead with confidence. That strong
pipeline has in turn ushered in a new era of US manufacturing,
which has sprouted up across much of the country — all to support
the growing industry.

Without promises of an
extension, development plans have skidded to a halt, orders have
dried up and large manufacturers are plotting their escape —
or at least a scaled-back presence. At stake, according to a
recent Navigant study, are as many as 37,000 jobs, a staggering
number for an industry that currently employs about 75,000
workers. And extension, meanwhile, would add 17,000 jobs,
according to the same study.

The industry has been down
this path before, but the last time the PTC was allowed to expire
the only real victim was project development. That was in 2004 and
at that time about three quarters of the industry’s supply chain
came from imports. Now, the US wind industry boasts about 500
manufacturing facilities, many of which are centered in places
like the Southeast, where wind energy is a rare find, but where
wind manufacturing is seen as one of the few bright spots for an
economy that’s struggling to find traction.

Ideologically, the wind
industry may find its broadest support among Democrats. But wind
generation remains strongest in staunch conservative pockets like
the Midwest, where turbines line farms across Texas and Iowa. And
in states like Oklahoma and Kansas, the industry is ramping up to
become a political force.

That’s why the PTC is a
rarity. It’s a political hot potato, yet it’s one with wide
support that has prominent Republicans and Democrats calling for
its extension. Most agree that the tax credit is worth the $4
billion–$5 billion bill that comes with a one-year extension.
According to PTC supporter Senator Charles Grassley, Republican of
Iowa, members of his party are reluctant to move ahead with
legislation until they can find budget savings to offset that
expense. So far, the support has produced lots of nods and
handshakes, but not enough legislators willing to jump into the
hot seat and vote for its extension. The hot seat, of course, is
boiling at the moment because of a perfect political storm. The
general election is just months away and a centerpiece of the
criticism is President Obama’s pursuit of a clean energy policy.
And nipping at its heels is the growing reality that fundamental
tax reform will follow the election. That has industry insiders
and analysts trying to read Washington’s swaying tea leaves. How
will tax reform come together? Will any type of tax policy receive
a long-term extension in this political landscape? And how does
wind differentiate itself amid the coming fray?

The Timetable

At Windpower 2012, the
American Wind Energy Association (AWEA)’s annual conference in
Atlanta in June, Republican strategist Karl Rove told those in
attendance that the worst thing that happened for the wind
industry was when Obama put the PTC extension on a Congressional
‘to-do list’ ahead of its August recess. Republicans say it won’t
happen because Obama is failing to show leadership on the issue,
and that the ultimatum proves their point. Democrats contend that
there’s no way House Republicans especially will give Obama a
political victory on the eve of the November election. Either way,
few are giving a pre-election agreement much hope, even if Udall
does succeed in giving the issue mainstream prominence each and
every day.

That pushes the real
political horse-trading into the tight window between the end of
the election in early November and the new Congress in
mid-January. By then, the PTC will be one of many cutthroat issues
on the agenda, and it could get lost in the fray as the Bush tax
cuts, the payroll tax holiday and the potential raising of the
debt ceiling take precedence.

According to Tim Kemper of
the Reznick Group, the PTC’s best bet is that it gets passed early
in the lame-duck session (taking place after the election for the
next Congress has been held, but before the current Congress has
reached the end of its constitutional term).

If that happens, the
industry may have enough deals waiting on the sidelines to retain
some of that 2012 momentum. The later a deal is struck, the more
difficult it will be to salvage 2013, which according to Bloomberg
New Energy Finance could see as little as 500 MW of new
installations. IHS Emerging Energy Research, meanwhile, has
projected the market could drop from 11 GW in 2012 to just over 2
GW in 2013.

This small window of
opportunity comes as America debates the future size of its
government, and ultimately what role taxpayers will play in energy
investment. The recent economic downturn has paved the way for
fundamental tax reform, and programmes like the PTC could get
caught in the line of fire.

The last big tax reform came
in 1986, and it was the type of divisive, laborious process that
makes rewriting the tax code in 2013 a long shot. That realisation
could, perhaps, bode well for a one-year extension, but that would
really put pressure on the industry to secure something longer
term.

Many in the industry don’t
think a one-year extension will do much to secure the confidence
of international companies and investors. That thinking extends to
statehouses across the country — those places where jobs are
the driving issue of the day. One such place is Arkansas, home to
major manufacturing operations for everything from blades (LM Wind
Power) to turbines (Nordex(NRDXF)
to Mitsubishi). The notion that a one-year extension, especially
with looming tax reform, will give companies the confidence to
stay or invest in his state is a nonstarter for Democratic
Governor Mike Beebe.

‘We don’t need it renewed
for a year,’ he told the industry at Windpower. ‘How in the world
do multimillion dollar investments get made ... how in the world
can business or industry chart a course ... how in the world can
the transmission system be expanded as it needs to be ... how in
the world can all these capital decisions be made when you’re
making public policy for something as important as this tax credit
on a year-to-year basis and you don’t know whether it’s going to
be renewed? That’s insane.

‘I can’t imagine with the
sort of [bipartisan] support that there would be any hesitancy at
all not only to renew, but to put in a cycle that people can be
assured that they can make decisions two years, three years and
five years down the road,’ he added.

Companies React

For legislators like Beebe
as well as Governor Sam Brownback of Kansas and Senator Charles
Grassley of Iowa, both Republicans, there’s little secret why they
are among those leading the crusade. Wind has become big business
in their states, and the success and impact of the industry easily
cuts along party lines. And that’s certainly why Udall is heading
up the charge from the Senate floor.

Earlier this year, when
Danish wind giant Vestas (VWDRY)
announced it was cutting more than 2300 jobs in Europe, it took
the opportunity to warn that it could slash its presence in the US
in half if the PTC failed to be extended. Many of those 1600
potential job losses could come in Colorado, where Vestas has
spent about $1 billion building three manufacturing plants and one
engineering facility. Those operations employ about 1700 people.

And it’s not just Vestas.
Vermont-based NRG Systems, which manufactures wind measurement
technology, had to cut jobs in May for the first time in its 30
years. President and CEO Jan Blittersdorf said, ‘Anything we can
do to get past this and back to steady growth is fine by me.’

Mitsubishi Heavy Motors
scrapped plans for a manufacturing plant in Beebe’s home state of
Arkansas, which certainly didn’t diminish his passion for strong
policy. And in rural Virginia, an area with few inroads in wind
generation, a 45-MW wind farm targeted for completion by the end
of this year was pushed back to 2015.

From developers to turbine
manufacturers, the wind industry has already seen a stark
downshift in its production plans. And while many are busy moving
ahead to close out a strong 2012, they’re looking at the stark
realities of 2013.

Where the Market is
Going

As industry giants react to
the lack of orders for 2013, they’re turning to other markets to
fill the void. During a visit by Grassley to the Acciona (ACXIF)
plant in Iowa, company officials said they’re turning to Canada to
fill their own pipeline. That’s a similar approach to that
reportedly considered by Siemens (SI)
and Gamesa (GCTAF),
who see the smaller Canadian market as a way to weather the
short-term downturn.

Canada in 2011 installed
more than 1200 MW of new wind energy capacity and has plans to
install 1500 MW in 2012. The country, which boasts stable policies
in Ontario and Quebec, has surpassed 5000 MW of cumulative
capacity, and it has plans to top 10,000 by 2015.
Partnerships with companies rooted in the US market may soften the
jobs impact there. But those companies are also sure to explore
their options in Latin America, where wind has been gaining
serious momentum.

Whether such a strategy
would work for long depends on transportation costs — the main
reason that domestic wind projects have drawn manufacturing to the
US. For a company like TPI Composites in Newton, Iowa, the blades
they make are not necessarily less expensive to produce than those
coming in from places like China. But transporting 50-metre blades
to construction sites can push transportation costs to $15 to $20
per mile, said TPI CEO Steve Lockard. The US wind industry has
evolved out of a need for transportation efficiency in a way
that’s unnecessary for relatively lightweight industries like
solar. So from the US wind industry’s point of view, feeding long
distance markets may keep the jobs intact, but it won’t create the
long-term stable economics it’s working to achieve.

Absent consistent federal
policy, domestic developers and manufacturers may look for other
ways to regain their post-PTC footing. According to Kemper, as
they view the prospects of a zero-build year, they’ll be forced to
reconsider what constitutes an acceptable deal. And they’ll also
be driven by existing state policies. Ultimately, we may see some
states increase their wind incentives as a way to drive production
and manufacturing within their own borders. While this likely
won’t make up for the potential loss of the PTC, it could lessen
the blow from its demise.

Dan Shreve of MAKE
Consulting recently released a report that looks at the US wind
industry from 2013 to 2016 under a series of scenarios, ranging
from no extension to the adoption of a Clean Energy Standard.
While MAKE expects the PTC to get a one-year extension, there are
other factors at play that could weigh down the industry over the
next few years regardless of an extension.

According to the report,
none of the policy scenarios it looked at supported more than 7 GW
of new installations per year, and the more likely scenario was
peaks of about 5 GW through 2016, with significantly lower figures
in the short term.

The reasons for the lower
wind installations have much to do with the expectation of
continued low natural gas prices and a lessening commitment from
utilities in states with a Renewable Portfolio Standard (RPS).
Those states, says the report, have made great strides in meeting
the RPS and they’ll need to invest less in wind to maintain their
pace.

‘Strong year-on-year build
cycles, plus effective “banking” of renewable energy credits
(RECs) ensure that many utilities are already in compliance and
can use cheap REC purchases from existing capacity,’ the report
says. MAKE’s baseline scenario estimates RPS policies will drive
little more than 15 GW of new capacity through 2016.

While this changing policy
landscape paints a murky portrait, it will force the industry to
in many ways stand on its own ahead of schedule. This, says the
report, will drive innovation and cost savings in ways that may
not lead to massive installment numbers, but will position it
better for future success.

Steve Leone is an Associate Editor
at RenewableEnergyWorld.com.
He has been a journalist for more than 15 years and has worked for
news organizations in Rhode Island, Maine, New Hampshire, Virginia
and California.